In March 2012, I created a High-Yield Portfolio for those seeking above-average cash flow and who are prepared to accept a higher level of risk. This month marks its fifth anniversary.
Since this portfolio invests all its money in stocks, 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 from this portfolio will receive favourable tax treatment as eligible dividends or return of capital.
The fund's initial value was $24,947.30, and I have 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.
Keg Royalties Income Fund (KEG.UN-T). This fund is the leading operator and franchisor of steakhouse restaurants in Canada and has a substantial presence in select regional markets in the United States. It was added to this portfolio in April 2013, when it was trading at $15.25. It has been weak recently, losing $1.18 per unit over the latest six months as income securities retreated with the rise in interest rates. That loss was partially offset by distributions of 48.85 cents per unit during the period. The shares yield 5.5 per cent at the current price.
AltaGas Ltd. (ALA-T). This stock was added to the portfolio in September with the purchase of 100 shares at a price of $33.46. It has since slumped by $2.48 as interest-sensitive stocks retreated. We are receiving dividends of 17.5 cents per month for a current yield of 6.8 per cent.
Medical Facilities Corp. (DR-T). This is another September addition that has not fared well so far. We bought 170 shares in at a price of $21.85, but they have since pulled back to $18.50. The shares pay a monthly dividend of 9.375 cents ($1.125 per year), to yield 6.1 per cent at this level.
Vermilion Energy (VET-T, VET-N). We added Vermilion to the portfolio two years ago because of its well-diversified international holdings and good management. Initially, the share price was weakened in the face of continued low oil prices, but it has rallied in the past year and is up $2.19 since September. This is one of the few mid-size energy companies that hasn't cut its dividend. The stock continues to pay 21.5 cents per month, to yield 5.2 per cent.
Exchange Income Corp. (EIF-T). This stock was added to the portfolio one year ago, and it been a winner from the start. The share price increased by $11.65 in our first year, and the company raised its dividend to 17.5 cents per month ($2.10 per year) during the fall. At the current price, the yield is 5.4 per cent.
Premium Brands Holding Corp. (PBH-T). This specialty food manufacturer and distributor was added to this portfolio in October 2013 and has been a powerhouse performer ever since, to the point where I felt it necessary to trim some of our position at the time of the last review in September. The share price rose another $15.85 during the latest six months, bringing our total return to date to an incredible 337 per cent. The company recently announced a 10.5-per-cent increase in the quarterly dividend, to 42 cents, effective with the March payment. That's great, but the continued run-up in the share price has pushed the yield down to 2.1 per cent. Normally, that would not qualify for a high-yield portfolio, however the yield based on our original purchase price is 8.6 per cent.
Morneau Shepell Inc. (MSI-T). Morneau Shepell Inc. is the largest Canadian-based firm offering benefits and pension consulting, outsourcing, and health management services. The shares are up 50 cents since the last update, and we continue to receive good cash flow from the monthly dividend of 6.5 cents (78 cents a year). The current yield is 4 per cent.
Pembina Pipeline Corp. (PPL-T, PBA-N). Pembina shares continue to recover from their slump, moving up another $2.83 in the latest period. The dividend continues to be 16 cents per month ($1.92 annually), for a yield of 4.5 per cent.
Sun Life Financial Inc. (SLF-T, SLF-N). Banks and life insurance companies received a big lift from two sources: the election of Donald Trump, who has promised to cut regulations in the sector, and the increase in interest rates. As a result, this stock jumped $6.72 in the past six months. We also received a 3.7-per-cent dividend increase, to 42 cents per share quarterly. The current yield is 3.4 per cent, but it is 6.6 per cent based on the original price.
Chemtrade Logistics Income Fund (CHE.UN-T). Chemtrade is one of the world's largest suppliers of sulphuric acid, liquid sulphur dioxide, and sodium chlorate and is one of the few income trusts still remaining. The share price is up $1.03 since the last review, a good move for a security that normally trades in a narrow range. The units pay a 10 cents monthly distribution ($1.20 a year), to yield 6.2 per cent.
We earned $20.70 from the cash we deposited in an account with EQ Bank that pays 2 per cent.
The table below shows what the portfolio looked like as of the close of trading on March 17. 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 taken into account, and the U.S. and Canadian dollars are treated as being at par for ease of tracking.
Comments: Although some interest-sensitive stocks lost ground in the latest quarter, this portfolio still managed a gain of 7.1 per cent during the period thanks to strong contributions from Premium Brands and Sun Life Financial. As of our fifth anniversary, we have a cumulative gain of 81.3 per cent, which works out to an average annual compound rate of return of 12.64 per cent. This is well in excess of our target.
Changes: Although AltaGas and Medical Facilities Corp. are off to poor starts, both companies offer very attractive yields, so we will keep them in the portfolio for now. All of the other securities are performing to expectations.
We will use some of our retained earnings to add to a few positions, as follows:
MSI – We will buy 10 more shares at $19.43, for a total cost of $194.30. That will bring our total to 260 shares and leave $9.25 in the cash reserve.
PPL – We have enough cash to buy another 10 shares, for a cost of $427. Our total position is now 110 shares, leaving us with cash of $5.08.
CHE.UN – We will buy 10 shares at $19.22, for a cost of $192.20. That will leave cash of $61.30 and bring our total unit count to 200.
Remember, do not do small trades like this unless you have a fee-based account. Otherwise, use dividend reinvestment plans if available.
We now have total cash of $2,192.75, which we will keep on deposit with EQ Bank earning 2 per cent.
Here's a look at the revised portfolio. I will revisit it in September.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.