One of the most popular features in my newsletters is the model portfolios. We offer about a dozen of them, designed for all types of investors, from very conservative to aggressive. Most include anywhere from eight to 10 securities, which requires an investment of at least $25,000 and usually more.
However, some people don't want to commit that much money. So in November 2012 I launched a mini portfolio for small investors with limited resources. This was done after two readers wrote to complain about the interest rate they would get by rolling over maturing GICs and to ask for alternative suggestions.
GICs are a useful option if preservation of capital is the No. 1 priority. But the returns they offer are even lower now than back in 2012. As of the time of writing, Scotiabank was offering only 1.75 per cent on a five-year term while Royal Bank was down to 1.65 per cent.
By taking a little risk, I felt the readers could improve their returns significantly by cashing in their GICs and redeploying the money into a small portfolio of stocks and preferred shares or corporate bonds.
The portfolio I originally created for Canada included three securities: the common stock of BCE Inc. and Scotiabank, plus preferred shares from Laurentian Bank of Canada. The original book value was $14,984.55.
The Laurentian Bank preferreds were subsequently redeemed. In their place, I substituted the 5.75 per cent convertible debentures from Firm Capital Mortgage Investment Corp.
The portfolio was last reviewed in August, at which time it was showing an average annual compound rate of return of 13.57 per cent. Here is how the three securities have fared in the six months since then.
BCE Inc. (BCE-T;BCE-N)
BCE shares have made a big move since the last update, rising by almost $10. We also received two dividends of 61.75 cents each, which brings our total return over the six months to 23 per cent. That's a welcome boost for the portfolio, but don't expect this stock to keep performing at that rate. For purposes of this portfolio, an annual return in the 6-per-cent range, including dividends, would be quite satisfactory.
Bank of Nova Scotia (BNS-T;BNS-N)
Scotiabank went in exactly the opposite direction, losing almost $10 a share as banking stocks weakened across the board. Scotiabank had been the star performer in this portfolio but a loss of 11 per cent since the last review ended that. However, even with that setback, the shares have returned 17.6 per cent since the portfolio was started.
Firm Capital Mortgage 5.75 per cent Convertible Debentures (FC.DB.A-T).
We bought these at $101.50 and they are now at $100.20 so we have a small capital loss. However, the real attraction of these convertibles is the high 5.75 per cent interest rate. Interest is paid twice yearly, on April 30 and Oct. 31. We received a semi-annual interest payment of $28.75 for each $1,000 debenture in October. We also received interest of $2.53 from the cash invested in a high-interest savings account at 1.3 per cent.
Here is how the Canadian Mini-Portfolio stood based on prices at midday on Jan. 28.
Comments
Since inception, the total return on this mini-portfolio is 29.3 per cent, which works out to a compound annual growth rate of 12.57 per cent. That's down slightly from the last review but well ahead of the returns offered by GICs.
Changes
I am not recommending any changes in the portfolio at this time. We will invest our total cash of $820.73 in a high-interest savings account paying 1.3 per cent, the current rate being offer by Scotiabank's Tangerine on-line service.
U.S. portfolio
A year ago I received a reader request for a U.S. dollar equivalent to the Canadian Mini-Portfolio. In this case, the goal was to improve on the return from a certificate of deposit (CD, the American equivalent of a GIC) while keeping risk to a minimum. The average rate for a five-year CD as of Jan. 22 was 0.87 per cent, according to Bankrate.com, although you could find better returns by shopping around.
In order to make the two portfolios as similar as possible, I chose a U.S. telecom stock, a big American bank, and a fixed-income exchange-traded fund. The value of the portfolio at inception was $14,954.
Here are the securities with comments on how they have done since my last review in August. All figures are in U.S. dollars.
AT&T (T-N)
The share price dropped more than $1 in the past six months as the company fights to maintain share in a highly competitive market. However, the quarterly dividend was increased by a penny to 47 cents per share.
Wells Fargo & Co. (WFC-N)
Wells Fargo stock had a good six months, gaining almost $3 per share. We also received one dividend of 35 cents per share during the period, bringing our total return in the year since we bought the position to 18.3 per cent.
PIMCO Income Opportunity Fund (PKO-N)
Our fixed-income ETF is not doing well. The share price is down more than $3 since our last review and by $4.16 since we made the purchase. Part of that was covered by the large year-end distribution of $1.59 we received at the end of December and the fund continues to pay 19 cents per unit each month. However, even with that great cash flow, PKO is showing a total return of minus 1.6 per cent after one year.
Here is how the portfolio looked on the afternoon of Jan. 28.
Comments
The U.S. portfolio is not doing as well as its Canadian counterpart and is really being carried by Wells Fargo. However, a 7.2 per cent return over the first year is very acceptable and much more than investors could earn from CDs.
Changes: I am not happy with PKO's performance. Bonds generally performed quite well in 2014 so a loss on this security is not acceptable. Therefore we will liquidate the position. Including accumulated distributions, we have $4,875.60 to reinvest.
We will replace it with units of the iShares Core U.S. Aggregate Bond ETF (AGG-N). This fund tracks the performance of the total U.S. investment grade bond market and is widely held with almost $24-billion in net assets. Monthly distributions vary but generally run about 20 cents per unit. The fund showed a total return of 6 per cent in 2014.
The price at the time of writing was $111.97 per unit. We will buy 40 units for a total cost of $4,478.80, leaving us with $396.80 for future investments.
Here is the revised portfolio.
I will revisit both portfolios in about six months.