This RRIF portfolio's returns are north of 10%

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One year ago, I created a portfolio for my Income Investor newsletter designed for registered retirement income funds (RRIFs). The objective was two-fold: to protect capital and to provide higher cash flow than investors could get from conservative securities like bonds and GICs.

At the time, I commented that during a period of low interest rates, it's impossible to set up a low-risk RRIF that would produce enough income to meet Ottawa's minimum withdrawal requirements, and that continues to be true today. For example, a 71-year-old must take out 7.38 per cent of the value of the plan on Jan. 1 of that year. By age 80, that rises to 8.75 per cent. It would require a great deal of risk to generate that much cash flow, which is inconsistent with the need to preserve capital.

My portfolio balances the twin objectives of income and safety by putting a significant amount into low-risk assets and the rest into higher-yielding securities. Unfortunately, even using this approach it will be difficult to generate enough profit to meet the minimum withdrawal requirements, although you'll come a lot closer than by using GICs.

Here are the components of the portfolio with a commentary on how they have fared to date.

MAXA Financial three-year GIC
Although I am not a great fan of GICs in a low interest rate environment, they provide virtually risk-free stability, which is important in a RRIF. Since the best rates are offered by smaller financial institutions, that's where we went shopping when the portfolio was created a year ago. At the time, MAXA Financial, an online subsidiary of Manitoba's Westoba Credit Union was paying 2.45 per cent for a three-year GIC. Plus, we receive distributions annually whereas most financial institutions pay at maturity. We invested $12,500 here so after one year we have earned $306.25.

Phillips, Hager & North Short Term Bond and Mortgage Fund (PHN250)
I added this fund last August as a replacement for the companion PH&N Total Return Bond Fund because I felt this one carried less risk in a time of potentially higher interest rates. It has returned 2.16 per cent over the past six months, which is very respectable given the low-risk nature of the portfolio.

CI Signature Dividend Fund (CIG610)
This is a low-risk fund that invests primarily in preferred shares and dividend-paying large-cap stocks such as the major banks, BCE, etc. It's a global portfolio with almost half the assets invested in international stocks, with U.S. issues dominating. The fund struggled in the early part of 2013 when interest-sensitive securities were hit by rate fears but has since rallied. Over the past six months, it has provided a total return of 8.45 per cent, very good for a relatively low-risk fund.

CI Signature High Income Fund (CIG686)
This balanced fund barely broke even for us during the first six months but has come back strongly, gaining just over 8 per cent since our last review in August. The fund invests in a portfolio of stocks, bonds, and cash divided 43.1 per cent/42.6 per cent/14.3 per cent as of the end of January. The stock holdings are mainly defensive in nature with three REITs among the top 10 holdings. The monthly cash flow is $0.07 per unit.

Sentry U.S. Growth and Income Fund (NCE737)
We added this fund in August to obtain more exposure to the U.S. market. It invests in a portfolio of U.S. dividend-paying stocks, both common and preferred, with a large-cap bias. Major holdings include blue-chip stocks like Oracle, Wells Fargo, IBM, JPMorgan Chase and Walmart. This move has turned out very well for us, with the fund generating a total return of more than 16 per cent since it was introduced. It pays a monthly distribution of $0.0292.

BCE Inc.
When we last reviewed this portfolio, BCE shares were trading at $42.67 after taking heavy losses over concerns about rising interest rates and reports that Verizon might enter the Canadian market. Since then, the stock has rallied by more than $5 a share, closing on Feb. 21 at $47.82. Add in the two dividends we received and we have a gain of almost 15 per cent in six months, which has taken us from a small loss position to a nice profit.

Inter Pipeline
This western pipeline continues to be an outstanding performer for us. It produced the best return during the first six months of this portfolio, when many of our securities struggled, and followed that up with a 21 per cent advance in the latest period. After one year, our total return on this one is almost 31 per cent, making it number one in the portfolio. The former limited partnership has converted to a corporation and the monthly dividend has increased to $0.1075.

Brookfield Infrastructure LP
This Bermuda-based limited partnership was our worst performer in the first six months after the portfolio launch, dropping 2.7 per cent. The shares were hit by interest rate concerns and a think tank report that was critical of the financial structure of the whole Brookfield organization. The shares have since recovered and we enjoyed a total return of almost 11 per cent in the latest six-month period. The LP raised its distribution by 12 per cent to US$0.48 per quarter, effective with the Feb. 26 payment, which is not included in these calculations (only dividends paid up to Feb. 21 are counted).

Davis + Henderson
This company was added to the portfolio in August because of its resilience in the face of interest rate pressure. That move paid off. We bought the stock at $25.23 and it now trades at $28.74. Including two quarterly dividends of $0.32 each, we are showing a profit of more than 16 per cent in six months.

Here's a look at the portfolio as it stood at the close of trading on Feb. 21.

I have included the accrued interest on the GIC in the payments column for clarity. Note that commissions are not deducted and that U.S. and Canadian currency is treated at par. Although this is a RRIF portfolio, withdrawals are not factored in, as this would make it impossible to track performance accurately.

Comments
We've seen a remarkable turnaround in this portfolio. During its first six months, it gained a piddling 1.1 per cent. Now after one year our total return based on the original book value of $49,910.30 is 10.38 per cent, which is probably better than most people managed in their personal plans and well above our target, which is 6 per cent to 8 per cent a year. Note that we achieved this return despite the fact that one-third of the portfolio is invested in low-risk, low-yield securities: the GIC and the PH&N fund.

Changes
All the components of this portfolio are ticking along well so I won't change any of them this time around. However, we should put some of our cash returns to work for us so we'll make these moves.

1. Buy 15 additional units of CIG610 at $13.88 for a cost outlay of $208.20. That will bring our total to 395 and reduce retained cash to $7.80.

2. Buy 20 more units of CIG686 for a cost of $296.60, leaving $68.54 in cash. We will now own 370 units.

3. Buy five shares of BCE Inc. at $47.82 for a cost of $239.10, leaving cash of $17.20. Our holding is now 115 shares.

4. Buy 10 shares of IPL at $28.76 for an outlay of $287.60. We have $286 in retained dividends so we will use $1.60 from our cash to make up the difference. We now own 230 shares.

5. Buy five shares of BIP.UN at $41.29 for an expense of $206.45, leaving cash of $8.55. That increases our position to 130 shares.

Here is the revised portfolio.

We will invest the $664.63 in cash in a high-interest savings account paying 1.35 per cent. I'll review the portfolio again in six months.