John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
We're approaching the third anniversary of Strategy Lab, so today is a good time to check in on my model dividend portfolio's performance.
But first, I'll recap the portfolio's original mission.
When I launched the model portfolio on Sept. 13, 2012, my main goal was to choose blue-chip companies that would raise their dividends regularly. I vowed to do very little trading, and for the most part I've stuck to that promise: Ten of the 12 original securities are still in the portfolio, the exceptions being McDonald's and Coca-Cola, which I replaced with Johnson & Johnson and Brookfield Infrastructure Partners, respectively, because I believed they had better growth prospects. (View the portfolio online at tgam.ca/divportfolio).
As a devotee of dividend growth investing, my focus is the rising cash flow that my portfolio throws off. In my model portfolio (and in my personal accounts), I periodically reinvest the cash that accumulates to take advantage of compounding, which is one of the best ways to build wealth over the long run.
In retirement, I'll start drawing on my dividends to supplement the income from my government and employer pensions.
Dividend investing isn't the only strategy that works, but it suits my personality. As a (somewhat lazy) buy-and-hold investor, I believe that time and compounding – not frequent trading – are my best friends.
By holding high-quality companies and focusing on the long run, I'm able to ride out market turmoil without getting unduly stressed out. In fact, I welcome market slumps like the one we've seen recently as a chance to deploy cash at attractive prices and higher yields.
Growing income
How much has the model portfolio's income grown? A lot, actually.
At inception, the portfolio was worth $50,000 (in virtual dollars) and its annual income, based on dividend rates at the time, was $1,875.85. (That works out to a yield of about 3.8 per cent; more on the yield in a moment.)
Fast-forward to today. Thanks to a combination of dividend increases, dividend reinvestments, the two aforementioned portfolio changes and the impact of a falling loonie (which boosts the value of my U.S. dividends in Canadian dollars) my dividend income has soared to $2,762.50 – an increase of 47.3 per cent over the portfolio's original income, equivalent to growth of 13.9 per cent on an annualized basis.
Think about that. In just three years my income has grown by nearly 50 per cent. I only wish my bosses at The Globe and Mail were so generous.
To take a few specific examples, Royal Bank and Telus have both raised their dividends six times since the portfolio's inception, Bank of Montreal has hiked its dividend five times and most of the others have announced three increases.
Dividend growth is the gift that keeps on giving. In the years ahead I fully expect that my companies will continue to hike their dividends – driven by rising revenue and earnings – and my portfolio's income will rise even further.
The best part is that I don't have to lift a finger to earn these raises – the companies do all the work.
Rising share prices
The value of my portfolio has also risen, although not as sharply as my dividend income. As of Aug. 31, the portfolio was worth $66,812.76 – up 33.6 per cent from its initial value. That's equivalent to a total return of about 10.3 per cent on an annualized basis.
As a benchmark comparison, the iShares S&P/TSX 60 Index ETF (XIU) posted a total return – from dividends and share price gains – of 7.7 per cent annualized over the same period. I'm pleased with my portfolio's performance versus XIU, although it's not a totally fair comparison because XIU doesn't hold any U.S. securities, which benefit from a weaker loonie.
Now, back to the yield. Because my dividends have grown faster than the value of my portfolio, the yield has climbed to about 4.1 per cent ($2,762.50 divided by $66,812.76).
Some investors also like to look at a measure called "yield on cost," which is an investment's current income (in this case $2,762.50) divided by its original purchase price ($50,000).
Using this formula, my yield on cost is about 5.5 per cent. It's important to remember that yield on cost is not the same as the actual yield. However, yield on cost is useful in that it can demonstrate the impact of dividend growth.
Closing thoughts
Dividend stocks aren't bulletproof. My model portfolio is down 4.9 per cent year to date (as of Aug. 31), reflecting the broad slump on stock markets.
But as long as my stocks continue to boost their payouts, I see no reason to panic about short-term market moves. I'd rather count the growing cash that my portfolio churns out.
That's the sort of "work" I don't mind doing.
John Heinzl