For the past few months, I’ve been building up the cash reserves in my model Yield Hog Dividend Growth Portfolio.
Now, it’s time to go shopping.
As unpleasant as the recent market downturn has been, dividend investors with money to spend should be cheering: Because stock prices have dropped and yields have risen, every dollar invested will generate more income.
Before I announce how I’ll be spending my cash, let’s quickly review how my model portfolio performed last year. Through Dec. 31, the portfolio posted a total return – including dividends – of negative 4.4 per cent. That compares with a drop of 8.9 per cent – also including dividends – for the S&P/TSX Composite Index.
Although I’m pleased to have outperformed the index, I’m not thrilled that my model portfolio ended the year with a value of $99,738.53 – slightly below the $100,000 (in virtual cash) I started with on Oct. 1, 2017. (The portfolio has climbed back into the black over the past few days.)
As I’ve said many times, even during rocky markets my portfolio’s income has continued to grow, thanks to regular dividend increases and dividend reinvestments. As of Jan. 1, my projected annual income has grown to about $4,690 – up 14.6 per cent from $4,094 at inception. Even in the face of some serious market volatility, the Yield Hog Dividend Growth Portfolio is living up to the “dividend growth” part of its name. And, now that I’m putting more cash to work, my dividend income is about to grow again.
I’ve got three separate transactions to announce today.
The first thing I’m going to do is purchase an additional 12 shares of TransCanada Corp. (TRP), bringing my total to 100 shares. TransCanada’s stock has tumbled about 15 per cent over the past year and now yields an attractive 5.2 per cent.
What makes TransCanada’s shares even more appealing is that the company will almost certainly raise its dividend in February, which would mark the 19th consecutive annual increase for the pipeline operator and power producer. As TransCanada reiterated at its investor day in November, the company intends to raise its dividend at an annual rate of 8 per cent to 10 per cent through 2021, and I expect that we’ll see more increases after that.
TransCanada is a relatively low-risk business, with about 95 per cent of EBITDA (earnings before interest, taxes, depreciation and amortization) coming from assets that are either regulated or contracted on a long-term basis. Even though the Keystone XL pipeline is still in limbo, TransCanada has another $36-billion in small- and medium-sized commercially secured projects that it expects to advance through 2023.
Now for my second purchase: I’m buying 10 shares of Brookfield Infrastructure Partners LP (BIP.UN), for a total of 110 shares. The global operator of utilities, toll roads, railways, ports, communications towers and other infrastructure assets has seen its share price fall nearly 10 per cent in the past year and now yields about 5.1 per cent. Like TransCanada, BIP has a high probability of hiking its distribution in February when it announces fourth-quarter results.
I like BIP because it’s diversified both geographically and by asset type, owns businesses with high barriers to entry and generates predictable and growing cash flows that allow it to raise its distribution (which is declared in U.S. dollars) regularly. BIP targets annual distribution growth of 5 per cent to 9 per cent and has exceeded its own guidance over the past five years, with a compound annual growth rate of more than 10 per cent.
Finally, I’m going to add 10 shares of BCE Inc. (BCE), for a total of 80 shares. BCE’s stock has fallen about 8 per cent in the past year, even as the telecommunications giant has benefited from strong wireless subscriber growth and the rollout of fibre-to-the-home. The shares now yield about 5.5 per cent and – given the company’s solid results – I expect that BCE will also raise its dividend in February, in keeping with previous years.
Now that I’ve spent most of the cash in my model portfolio, it’s time to sit back and enjoy the fruits of compounding. As my portfolio’s cash reserves build up again, I’ll be reinvesting my dividends at various times throughout the year. Stay tuned.
Full disclosure: The author owns shares of TRP, BIP.UN and BCE personally, in addition to holding them in his model Yield Hog Dividend Growth Portfolio.
John Heinzl