Globe Unlimited subscribers can click here for the complete list of stocks and other details in John Heinzl's new Yield Hog dividend growth portfolio.
Hands up if you know what the stock market is going to do tomorrow. How about next week, or next year?
I don't have a clue. Stocks could be on the cusp of a bull market, a bear market or a long period of going nowhere. Predicting these things is a fool's errand.
But there is one element of investing that is very predictable: dividends. Even as stock prices bounce up and down, dividends exhibit remarkable regularity. Companies pay them every quarter, or every month in some cases, and if you invest in great businesses those dividends will grow over time with a company's earnings.
My Strategy Lab model dividend portfolio is proof of that. Over the past five years, the portfolio's annual dividend income soared by 80 per cent. The total return – from dividends and share price gains – clocked in at 11.6 per cent on an annualized basis, easily topping the S&P/TSX composite index's annualized total return of 7.2 per cent over the same period.
Was it a fluke? A flash in the pan? Let's find out.
Now that Strategy Lab has ended its five-year run, today I'm unveiling my new Yield Hog dividend growth portfolio.
You'll notice some overlap with the stocks in my old Strategy Lab portfolio, but there are also some key differences. The new portfolio is bigger – it has 22 securities, up from 12 – and the starting value has doubled to $100,000.
The "money" I'm using isn't real, but I also own all of these securities personally. So I have a vested interest in seeing the portfolio perform well. Can I guarantee it will make money right out of the gate or beat the S&P/TSX composite index consistently? No. But I'm confident that most – ideally, all – of the securities will continue to raise their dividends. And if their dividends grow, their share prices should ultimately rise, too.
But you don't have to take my word for any of this. Many of the companies in the portfolio have come right out and said they intend to raise their dividends annually. And several even tell you by how much.
Consider Fortis Inc. (FTS-T) The gas and electric utility operator – which has a 43-year record of dividend growth – has said it aims to hike its payout at an annual rate of 6 per cent through 2021. Another example is Algonquin Power & Utilities Corp. (AQN-T), which is targeting 10-per-cent dividend growth annually. Then there's pipeline operator TransCanada Corp. (TRP-T), which expects to raise its dividend at the "upper end" of 8 per cent to 10 per cent a year through 2020.
Dividends aren't official until the board approves them, but companies probably wouldn't make such projections unless they were confident in their ability to deliver.
Not all of the companies in the portfolio are as specific about their future plans, but all have a history of raising their payments to shareholders. Over the past five years, their dividends have grown at an average compound annual rate of 7.7 per cent.
In addition to pipelines and utilities, other sectors represented include banks, telecoms, real estate investment trusts, power producers, insurance and restaurant royalty companies.
I'll admit that personal reasons came into play for a few of my picks. For instance, I like to eat pizza and burgers, so I also enjoy collecting dividends from Pizza Pizza Royalty Corp. (PZA-T) and A&W Revenue Royalties Income Fund (AW.UN-T). As a hockey dad, I buy a lot of stuff at Canadian Tire, which made CT REIT (CRT.UN-T) – the retailer's real estate arm – a natural fit.
What you won't find in the portfolio are any individual U.S. companies. Instead, I chose to get my U.S. exposure through a broadly diversified fund – the iShares Core Dividend Growth ETF (DGRO-N) – that holds more than 400 U.S. stocks including household names such as Johnson & Johnson, Procter & Gamble Co., Microsoft Corp., Apple Inc. and McDonald's Corp. With an expense ratio of just 0.08 per cent, DGRO is an economical way to own the best U.S. dividend-growing companies.
I've deliberately kept my U.S. exposure low for now – just 5 per cent – because I don't want to be sideswiped if the Canadian dollar rises sharply from its current level of about 80 cents (U.S.). But if the loonie should head toward par, that would be the time I would consider adding to my DGRO position.
The portfolio also contains one Canadian ETF, the iShares S&P/TSX 60 Index fund (XIU-T), which holds the largest Canadian companies. The purpose was twofold: to increase diversification, and to provide a convenient place to reinvest my dividends if I'm feeling a) indecisive; b) lazy; or c) paralyzed by fear because the market is getting clobbered. Reinvesting dividends is one of the keys to building wealth and I'll be doing it regularly.
Another thing you may notice is that all of the companies in the portfolio yield at least 3 per cent (the two ETFs are exceptions). This was by design: There are lots of great companies out there that yield 1 per cent or 2 per cent, but my primary goal was to build a portfolio that generates a high – and growing – income.
One thing I want to stress: The Yield Hog dividend growth portfolio isn't meant to be copied exactly. Rather, the goal is to provide a real-time illustration of dividend growth investing that informs and educates people and – fingers crossed – validates the strategy. If you're buying stocks for your own portfolio, be sure to do your own due diligence.
In future columns, I'll be writing about my stock picks in more detail. I'll also be discussing other dividend stocks and ETFs that are worthy of consideration and interviewing dividend fund managers for their ideas. The Globe and Mail will provide detailed monthly updates on the portfolio's performance.
Finally, I'll share a quick anecdote. Last Friday, after I'd finalized my list of stocks, I received an e-mail alert: Emera Inc., one of my picks, had just announced a dividend increase of 8 per cent – right in line with the company's forecast.
I'd say we're off to a pretty good start.