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Inside the Market After suffering a setback, it’s time to shake up my high-yield portfolio

It’s time for a review of our High-Yield Portfolio, which was started seven years ago in March 2012.

This portfolio is designed for those who are looking for above-average cash flow and are comfortable with a higher level of risk. It invests entirely in stocks, so it is best suited for non-registered accounts where any capital losses can be deducted from taxable capital gains. Also, a high percentage of the payments will receive favourable tax treatment as eligible dividends or return of capital.

The initial value was $24,947.30, and I set a target average annual rate of return of 7 per cent to 8 per cent annually. Here is a review of the securities we own and how they have performed in the six months since our last review in September. Results are to March 22.

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The Keg Royalties Income Fund (KEG.UN-T). The units continue to slip in value and are down 72 cents since the last review. We received distributions of 59.76 cents per unit. The yield is 6.7 per cent at the current price, but the price drop is a concern. In May 2017, the units were trading at over $22, but they have been in a downtrend since.

Vermilion Energy Inc. (VET-T). The energy industry continues to have problems, and this stock has suffered as a result. The shares are down $8.05 since the last review. The distribution remains intact at 23 cents a month, giving us a yield of 8.2 per cent. That may look good at first glance, but it’s actually a signal that the market feels the payout is not sustainable.

Enbridge Inc. (ENB-T). Our patience with this stock has been finally rewarded. After a big move higher in the last period, we added another $4.31 per share in the latest six months. As well, the dividend was increased by 10 per cent, to 73.8 cents per quarter.

Premium Brands Holding Corp. (PBH-T). Premium Brands has been a huge winner for us, but the share price has been slipping for some time and dropped almost $21 in the latest period. We’re still ahead by 291 per cent on the original purchase price, but no one wants to see losses of that magnitude in a portfolio. Even with the price drop, the yield is still only 2.5 per cent. It’s time to move on.

Morneau Shepell Inc. (MSI-T). The share slipped by 29 cents in the latest period, but that was offset by 39 cents in total distributions, so we ended up marginally ahead. However, the yield is only 2.9 per cent, low for this type of portfolio.

Pembina Pipeline Corp. (PPL-T). Pembina shares rose during the period, gaining $6.09. Due to timing, we received seven dividends of 19 cents per month, for a total of $1.33 per share. The stock yields 4.6 per cent at the current price.

Sun Life Financial Inc. (SLF-T). The stock was down 51 cents in the latest period, but we received two dividends totaling $1 per share, so we ended up slightly ahead.

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Chemtrade Logistics Income Fund (CHE.UN-T). This is a cyclical stock that got hammered in the latest period, losing $6.38 per share. It’s now trading at close to its lowest level in five years, and the yield is an elevated 12.6 per cent.

Canadian Imperial Bank of Commerce (CM-T). We added this stock one year ago to bring another large-cap position into what has essentially been a small-cap portfolio. It did well over the summer, but the shares dropped sharply in the latest period. With the quarterly dividend of $1.36 per share, we have broken even on this position since it was added.

Dream Global REIT (DRG.UN-T). We added this REIT to the portfolio in September at a price of $14.46. Unfortunately, it has not performed as well as expected, losing 60 cents per unit since it was selected. We received seven distributions totaling 46.669 cents per unit.

We earned $27.02 from the cash we deposited in an account with EQ Bank that pays 2.3 per cent.

The table below shows what the portfolio looked like as of the close of trading on March 22. The weighting is the percentage of the market value of the security in relation to the total market value of the portfolio. The gain/loss shows the performance of the security since inception, or since it was added to the portfolio. Sales commissions are not considered, and the U.S. and Canadian dollars are treated as being at par for ease of tracking.

Income Investor High Yield Portfolio (a/o March 22)

Weight %Avg. priceBook ValueCurrent PriceMarket ValueRetained IncomeGain/Loss %
KEG.UN-T8$15.96$3,191.40$16.86$3,372.00$247.7213.4
VET-T6.4$52.19$4,175.00$33.60$2,688.00$385.30-26.4
ENB-T8.2$49.21$3,444.70$49.17$3,441.90$282.248.1
PBH-T9$19.49$974.50$76.29$3,814.50$602.33353.2
MSI-T17.3$13.34$3,602.70$27.11$7,319.70$144.75107.2
PPL-T12.9$30.54$3,359.35$49.61$5,457.10$503.3877.4
SLF-T15.5$27.48$3,571.85$50.32$6,541.60$223.6389.4
CHE-UN-T5$16.20$3,563.01$9.55$2,101.00$264.00-33.6
CM-T12.9$114.07$5,703.50$109.28$5,464.00$269.000.05
DRG-UN-T3.6$14.46$1,590.60$13.86$1,524.60$51.34-0.09
Cash1.2$453.04$480.06
Total100$33,629.65$42,204.46$2,973.6934.3
Inception$24,947.3081.1

Comments: Enbridge and Pembina Pipeline did well during the period, but the overall result was dragged down by big losses from Premium Brands, Vermilion, Chemtrade, and CIBC. The net result was an overall decline of 4.36 per cent in the value of the portfolio.

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On the positive side, the dividends/distributions continued to be strong, with no cuts and a few increases.

Since inception seven years ago, we are ahead 81.1 per cent. That works out to a compound annual return of 8.85 per cent, which is slightly ahead of target.

Changes: We are going to sell the following securities:

Vermilion Energy. It has been a disappointment, and the prospects for the energy sector are not encouraging. Total proceeds from the sale including retained earnings are $3,073.30.

Premium Brands. We made a huge capital gain on this one, but now the stock is falling back, and the yield is not high enough to keep it in this portfolio. Total proceeds: $4,416.83.

Chemtrade. As mentioned, this is a cyclical stock, and right now the cycle is working against us. Also, the company’s financials raise serious questions about the sustainability of the distributions. Total proceeds: $2,365.

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This leaves us with a total of $9,855.13 for new investments.

We will make these purchases:

Canoe EIT Income Fund (EIT.UN-T). This fund was added to our Recommended List in the issue of Jan. 31. It invests in a portfolio of high-quality Canadian and U.S. stocks, pays a distribution of 10 cents per month (yield 10.7 per cent), and generally trades in a narrow range of $11-$13. The current price is $11.21. We will buy 300 units for a cost of $3,363.

Northview REIT (NVU.UN-T). This REIT, which used to operate mainly in Alberta and the Territories, has been expanding its footprint nationally and posting some strong numbers. The units pay 13.58 cents per month to yield 5.6 per cent at the current price of $29.19. We will buy 100 units for a cost of $2,919.

Capital Power Corp. (CPX-T). This power generation company based in Edmonton has been aggressively expanding its business through acquisitions and posting some strong financial numbers. A 7-per-cent dividend increase last summer brought the quarterly dividend to 44.75 cents ($1.79 per share) to yield 5.7 per cent at the current price of $31.61. We will buy 100 shares for $3,161.

That leaves $412.13, which we will add to our cash account.

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As well, we will buy another 10 shares in Pembina Pipeline for a cost of $496.10, leaving retained earnings of $7.28.

After these transactions, our cash balances will total $2,118.15. We will switch this balance to Motive Financial, owned by Canadian Western Bank, where we can earn 2.8 per cent.

Here is the revised portfolio. I will review it again in September.

Income Investor High Yield Portfolio (revised March 22)

Weight %Total sharesAvg. priceBook valueCurrent priceMarket valueRetained income
KEG-UN-T7.7200$15.96$3,191.40$16.86$3,372.00$247.72
EIT-UN-T7.7300$11.21$3,363.00$11.21$3,363.00$0
ENB-T7.870$49.21$3,444.70$49.17$3,441.90$282.24
NVU-UN-T6.6100$29.19$2,919.00$29.19$2,919.00$0
MSI-T16.7270$13.34$3,602.70$27.11$7,319.70$144.75
PPL-T13.5120$32.13$3,855.45$49.61$5,953.20$7.28
SLF-T14.9130$27.48$3,571.85$50.32$6,541.60$223.63
CPX-T7.2100$31.61$3,161.00$31.61$3,161.00$0
CM-T12.450$114.07$5,703.50$109.28$5,464.00$269.00
DRG-UN-T3.5110$14.46$1,590.60$13.86$1,524.60$51.34
Cash2$892.19$892.19
Total100$35,295.39$43,952.19$1,225.96
Inception$24,947.30

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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