Barring a last-minute collapse, 2016 will go down as a very good year for my Strategy Lab model dividend portfolio.
Today, I'll look back at how the portfolio performed over the past 12 months. Next time, I'll look ahead to what may be in store for 2017.
First, a quick reminder of my investing philosophy:
When The Globe and Mail launched Strategy Lab in September of 2012, my primary goal as the dividend investor was to build a portfolio of blue-chip stocks that would raise their payouts regularly. I vowed to do very little trading – I've replaced just two stocks since then – and to let time and compounding do the heavy lifting for me.
I use the same strategy in my personal portfolio, and the results have been gratifying. The combination of dividends, dividend increases and dividend reinvestments – which I execute when a sufficient amount of cash builds up – creates a powerful compounding machine that generates steadily growing income and solid capital gains.
My model dividend portfolio's performance in 2016 provides a great illustration.
Through Dec. 19, the portfolio posted a year-to-date total return (including dividends) of 21.4 per cent – tops among the four Strategy Lab participants.
The portfolio's longer-term results have also been solid. Having started with $50,000 of virtual cash, the portfolio is now worth $82,254, for a total return of 64.5 per cent or about 12.4 per cent on an annualized basis. That puts me in third place in Strategy Lab's overall rankings, but still handily beats the 8.2-per-cent annualized total return for the S&P/TSX composite index over the same period.
What went right in 2016? Well, a couple of things.
Dividend increases are the foundation of my strategy, and my portfolio continued to excel in that regard. All 11 of my companies raised their dividends at least once, and four (Bank of Montreal, Brookfield Infrastructure Partners, Royal Bank of Canada and Telus) raised their dividends twice. All told, I received 15 dividend hikes during the year.
The one exchange-traded fund in my model portfolio – the iShares S&P/TSX Capped REIT Index ETF – has also paid higher total distributions through November of 2016 compared with the same period in 2015. So, in baseball terms, my securities batted a thousand.
I don't want to say "I told you so," but I'll repeat what I wrote in my 2016 outlook column a year ago: "I have no idea what the stock market will do in 2016 … but here's something I can say with a high degree of confidence: Most of the companies in my Strategy Lab model dividend portfolio … will raise their dividends at least once in 2016."
That's the beauty of dividend-growth investing: Even as stock prices bounce around, sometimes violently, dividends are actually quite predictable. Many of the companies I own – such as Enbridge, Fortis, Telus and TransCanada – have even projected their dividend growth rates for several years into the future. Only companies with highly predictable cash flow can do that, which is precisely why I own these kinds of stocks.
The other thing that went right this year is that all 12 of my securities rose in price, led by especially strong gains for TransCanada (up 36 per cent), Brookfield Infrastructure (27.4 per cent), Bank of Montreal (24.5 per cent), Royal Bank (24.3 per cent) and Enbridge (24.1 per cent).
My worst performers in 2016 were Procter & Gamble (up 6.2 per cent) and BCE (up 7.5 per cent).
As happy as I am with my portfolio's performance, please don't interpret any of this as gloating. As I've said many times, dividend investing has a track record of producing solid returns but it is not the only strategy that works. The excellent results of the other Strategy Lab participants are proof of that.
It's also worth mentioning that the stock market was very good to me – and to investors in general – this year, but there are no guarantees that these sorts of outsized returns will continue.
In fact, I can pretty much guarantee they won't, given that the stock market's long-term annualized total return is in the high single digits.
Still, I'm confident that my dividends will continue to grow and that, over the long run, my stock prices will also continue to rise.