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yield hog

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

It's been nearly three months since my last Strategy Lab update, so today I'll review how my model dividend portfolio has been faring. I'll also disclose what I'm doing with the "cash" that has built up in my virtual account.

First, I'll briefly recap my original mission.

In my model portfolio (view it here), I invest in blue-chip stocks with a history of raising their dividends. Because I don't like to lose sleep over my investments, I stick with conservative, well-established companies that benefit from a strong brand name, limited competition, regulated returns or some other advantage that will – barring something unexpected – keep the dividend hikes coming for many years.

My goal is to hold these dividend growth stocks for the long run and periodically reinvest the rising cash flow to benefit from compounding. I follow a similar strategy in my personal portfolio, except that I also hold guaranteed investment certificates for fixed-income exposure. Although I'm reinvesting my dividends for now, eventually I plan to draw on the cash to supplement other sources of income in retirement.

Click on image to enlarge

So far, the model portfolio's performance has been quite gratifying.

Since the portfolio's inception on Sept. 13, 2012, all 11 stocks have raised their dividends multiple times. Seven have done so twice (BCE, Canadian Utilities, Enbridge, Fortis, Coca-Cola, Procter & Gamble, TransCanada), one three times (McDonald's), two four times (Bank of Montreal, Royal Bank) and one five times (Telus). The sole exchange-traded fund (the iShares S&P/TSX Capped REIT Index ETF) has raised and lowered its distribution on several occasions but the general direction has been up.

Thanks largely to these dividend hikes, the portfolio is now churning out about 25 per cent more cash than it was at inception. The portfolio's income has also been boosted by dividend reinvestment and by a tumbling loonie, which makes dividends from U.S. stocks worth more when converted to Canadian dollars.

The share price gains have also been significant, with all but one of the 12 securities now trading at prices sharply higher than when I "bought" them.

Putting dividends and share price gains together, the portfolio has produced a total return of 40.3 per cent and is worth $70,151 (as of Nov. 30), up from an initial value of $50,000. That compares with a total return of about 26 per cent for the S&P/TSX composite index over the same period. In recent weeks, the S&P/TSX has been hit by plunging energy prices, but my model portfolio has been spared because it has no direct exposure to oil and gas producers.

I'm expecting more good news shortly: Enbridge and Fortis will almost certainly raise their dividends again by the end of the year, followed in early 2015 by increases from Canadian Utilities, TransCanada and possibly others. I don't want to count my dividends before they've hatched, so to speak, but these companies have an established pattern of annual dividend hikes that I expect will continue.

One of the nice things about dividend growth investing is that, after the initial portfolio is set up, there isn't a lot of heavy lifting required. The hardest part is figuring out what to do with the cash that builds up.

That brings us to the second part of today's column.

On Tuesday, Bank of Montreal raised its dividend by 2.6 per cent – its third increase in the past year and fourth since I chose it for my Strategy Lab model dividend portfolio. However, the bank's quarterly profit came up short of analyst estimates and the stock fell 2.2 per cent.

Buying a good company when its stock has suffered a setback can be a profitable investing strategy, so today I'm purchasing an additional 10 shares of Bank of Montreal, which will give me a total of 80 BMO shares yielding 3.8 per cent. The purchase will use up most of my portfolio's cash balance of $871.68 (which includes $121.05 in dividends received on Dec. 1 from Canadian Utilities, Enbridge and Fortis).

The Strategy Lab model dividend portfolio has performed pretty much as I expected. While it's impossible to predict what stock prices will do in the short run, in the long run I expect that the combination of dividend growth, dividend reinvestment and capital appreciation will continue to produce satisfying returns.

Disclosure: The author also personally owns all of the stocks mentioned in this column.

Globe app users click here for a chart showing BMO dividends