My dividend portfolio is off to a solid start despite surging bond yields

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It's been more than three months since I launched my Yield Hog Model Dividend Growth Portfolio. Today, I'll provide an update on the portfolio's performance and make a few fearless predictions for the year ahead.

Feel free to save this column so that, a year from now, you can a) tell me what a genius I am, or b) mock me mercilessly. Before we get out the crystal ball, let's look at how the model portfolio performed in its inaugural quarter.

At the end of September, I started the portfolio with $100,000 in virtual cash, which I spread across 22 securities – 20 stocks and two exchange-traded funds. My goal was to build a diversified collection of blue-chip holdings that would raise their dividends regularly and deliver modest capital growth as well. (I also own all of these stocks personally, so this is more than a theoretical exercise for me.)

The early results have been gratifying. At the end of December, the portfolio's value had grown to $104,315.24, for a three-month total return of 4.32 per cent. If that pace were to continue – and I'm not suggesting it will – the compound annualized return would be more than 18 per cent.

Before anyone gets too excited, I should point out that the S&P/TSX composite index posted a total return of 4.45 per cent over the same three-month period. So the model portfolio actually trailed the index by a very slight margin. Three months isn't long enough to judge the performance of any strategy, of course; the real test will be how the portfolio does over several years.

Even though the portfolio is still a baby, it's already living up to the "dividend growth" part of its name. In the first three months, six securities – A&W Revenue Royalties Income Fund (AW.UN), Bank of Montreal (BMO), CT REIT (CRT.UN), Emera (EMA), Enbridge (ENB) and Telus (T) – hiked their dividends. The average increase was 5 per cent.

Now, let's get out that crystal ball.

One of the nice things about dividend investing is that it's predictable. Even as the stock market, interest rates and the economy bounce up and down, great companies continue to pay dividends through good times and bad. Many companies also raise their dividends regularly.

Consider Canadian Utilities. The Calgary-based electric and gas utility operator has hiked its dividend annually for more than four decades. In recent years, the increases have come like clockwork every January and averaged more than 10 per cent.

There are no guarantees that Canadian Utilities' next increase will also be in the double digits, but another hike is almost certainly coming this month. The only question is how large it will be.

Another example of a serial dividend raiser is TransCanada, which has increased its payout every year since 2000. The pipeline and power company typically raises its dividend in February and, citing $24-billion of near-term growth projects, it's projecting annual dividend growth "at the upper end" of its 8-per-cent to 10-per-cent target through 2020.

When a company not only raises its dividend, but projects dividend increases several years into the future, it's a very positive sign. It tells you management is confident in the outlook for the business and in the company's ability to grow revenue and earnings to support the rising payout.

Brookfield Infrastructure Partners LP (BIP.UN) is another example. The owner of infrastructure assets around the globe – including toll roads, ports, utilities and communications towers – has raised its distribution at a compound annual rate of 12 per cent since 2009, exceeding its own growth target of 5 per cent to 9 per cent. Given the company's strong performance, I fully expect another increase when it announces fourth-quarter results in the next month or so.

That's just a sample of the stocks in my model portfolio that I expect will boost their dividends in 2018. I'm also looking for increases from the banks, telecoms, real estate investment trusts and other pipelines and utilities I hold.

Can I guarantee that the portfolio will beat the index in 2018? No.

For one thing, bond yields have been rising fast, posing a potential headwind for utilities, REITs and other dividend stocks that are sensitive to rising interest rates. As of Tuesday afternoon, the benchmark five-year Government of Canada bond was yielding about 2 per cent, having more than doubled from its levels in early June of 2017.

With the economy humming along, the Bank of Canada – which raised its overnight rate twice last year – is widely expected to hike rates by a quarter-point again next week, which would bring the target for the overnight rate to 1.25 per cent from the current 1 per cent.

Another factor that could hurt the model portfolio is rising energy prices. I deliberately avoided oil and gas producers because their earnings and dividends rise and fall with volatile commodity prices, but that decision could cost me – at least relative to the index – if energy prices continue to rise.

Still, as a dividend-growth investor, I'm comfortable with those risks. As long as my stocks continue to raise their dividends – supported by growing revenues and cash flows – I'm confident that their share prices will also rise over the long run.

I'll be checking back with the portfolio regularly in 2018 and updating you on its progress.