Yield Hog

A patient portfolio to soothe fearful investors

The Globe and Mail

Susan Blanchard, a portfolio manager with AMI Partners Investment Counsel in Toronto, understands the power of growing dividends. Photo: Peter Power/The Globe and Mail

Susan Blanchard, manager of the Growing Income Fund at AMI Partners Investment Counsel, sums up her long-term approach this way: “We tend to choose the names and hold them until they break.”

To her credit, her stocks break very rarely, but when they do, her response is swift. When Manulife Financial slashed its dividend in 2009, “the minute it was cut I came in and by 9:30 it was sold,” she says.

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That disciplined approach is one reason the fund, which invests in companies with rising dividends, has posted an annual total return of 4.8 per cent over the past five years (before fees), compared with the S&P/TSX composite index’s gain of 2.6 per cent. It hasn’t hurt that, in the more than a decade she’s managed the fund, Manulife is the only company she can recall that cut its payout.

Dividends reduce volatility

With a little under $10-million in assets, the Growing Income Fund is a small part of the $3-billion that Toronto-based AMI manages on behalf of pension funds, foundations, endowments and high net worth investors. But the fund’s track record demonstrates how focusing on dividend growth can deliver solid returns with volatility that, in this case, is about two-thirds that of the market, thanks to the stable return that dividends provide.

“We can’t control stock prices, but dividends are something that are pretty predictable,” she says.

With that in mind, AMI is marketing the fund to institutional investors as a way to insulate themselves from the wild ups and downs that have rocked financial markets in recent years.

“In the pension industry ‘de-risking’ is a popular catch phrase now because a lot of pension funds are suddenly looking at their underfunded positions and wondering how they can get back on side in a low-risk type of investment and still make money,” says Craig Labbett, one of Ms. Blanchard’s fellow partners at AMI, which is 70-per-cent owned by its principals and 30-per-cent by Toronto-Dominion Bank.

What she looks for

When choosing stocks, Ms. Blanchard considers several factors. A history of dividend growth is important, but she’ll also consider a company that recently initiated a dividend if it has the growing free cash flow to support future increases.

“We’re looking for the ability and the desire to increase that dividend,” she says.

She also evaluates management’s record of allocating capital prudently and tries to buy the shares at a reasonable price, although she’s not afraid to pay up for stocks with above-average growth. Because she focuses on dividend growth and doesn’t necessarily look for a fat dividend up front, yields in the portfolio vary from about 1 per cent to more than 5 per cent, with an average of about 3.5 per cent.

A mixed bag

The fund owns many of the usual suspects, including the Big Six banks, insurer Great-West Lifeco, communications giants BCE and Rogers, gas and electric utility Fortis, oil and gas producer Canadian Natural Resources and cheese maker Saputo Some of her oldest stocks have delivered extraordinary gains, including Canadian National Railway, which she purchased in December, 1998.

Since then, Canada’s biggest railway has increased its quarterly dividend 13 times, raising it to 32.5 cents a share from 4.4 cents (adjusted for splits), while the stock has climbed to about $75 from $13. The total return over that period, assuming all dividends were reinvested, is an eye-popping 539 per cent, or 15.7 per cent on an annualized basis.

“Since it started paying a dividend it’s increased it every year basically through thick and thin. Because they manage their cash flow … and know how to control their expenses, there’s lots of money left over for the dividend,” she says.

Not all of the fund’s stocks are household names. A recent addition is Stella-Jones, which produces pressure-treated wood products including railway ties and utility poles. The stock’s 1.3-per-cent yield won’t make you rich overnight, but the company has been raising its dividend at a feverish pace, including three increases in the past 15 months.

Another recent buy was Black Diamond Group, which yields 4.1 per cent and provides modular housing for workers in the energy sector and other industries. Much of Black Diamond’s housing is temporary, but if the stock pans out like some of her other picks, it could find a home in her portfolio for a long time to come.

Follow on Twitter: @johnheinzl

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