I'd be lying if I said I've enjoyed watching my model Yield Hog Dividend Growth Portfolio shrink in value over the past couple of weeks.
But there's a silver lining – actually, two: My dividends have continued to grow and, now that I'm ready to reinvest some of my cash, there's a veritable storewide sale on dividend stocks.
Today, I'll provide an update on the portfolio's performance. Then I'll reveal how I'm spending the "money" that has built up in the portfolio. (The model portfolio uses virtual dollars, but I own all of the stocks personally as well.)
First, let's get the bad news out of the way.
From inception on Oct. 1, 2017, through Feb. 12, 2018, the model portfolio has posted a total return of negative 2.6 per cent (all returns include dividends). That compares with a total return of negative 1.6 per cent for the S&P/TSX composite index. Both have struggled amid fears of rising interest rates.
Now, the good news: The model portfolio's income continues to grow.
Last week, even as stock markets around the world were having conniptions, three of my companies hiked their payouts: Manulife Financial Corp. (up 7 per cent), BCE Inc. (5.2 per cent) and Brookfield Infrastructure Partners LP (8 per cent).
Including these and previous dividend hikes, my portfolio's annualized income has grown to $4,215 from $4,094 at inception – a gain of 3 per cent. And here's the thing: The setback in share prices is almost certainly temporary, whereas I expect that my dividend income will continue to rise, month after month, year after year.
I'm now sitting on $1,314.79 in cash, and it's time to go shopping.
My first purchase is an additional 15 shares of Emera Inc. (EMA), which brings my position to 115 shares. The Halifax-based utility operator's stock has skidded about 14 per cent since the portfolio's inception, hurt by rising rates and the news that Emera's Atlantic Link project, which proposed sending renewable power from Atlantic Canada to New England, was not selected by Massachusetts Clean Energy. (Emera says it will continue to pursue the project.)
This has created an opportunity. Emera's shares now yield an attractive 5.6 per cent and trade at an inexpensive multiple of about 14.5 times estimated 2018 earnings – close to the historical trough of about 14 last reached during the financial crisis, according to analyst David Quezada of Raymond James.
"While we acknowledge that we are likely in the early stages of a rising rate environment, we now see very modest downside" in Emera's share price, Mr. Quezada said in a note. "Accordingly, we now believe shares of EMA represent a very attractive risk/reward profile, supporting our recent upgrade to 'outperform.'"
Despite losing out on Atlantic Link, Emera still has plenty of growth ahead. The company plans to invest US$883-million in solar projects at its Tampa Electric subsidiary and could potentially deploy another US$800-million for a coal-to-gas conversion of the Florida utility's Big Bend generating station. These projects, in addition to investments in other regulated operations, will increase the company's rate base – the value of assets on which a utility is permitted to earn a regulated rate of return – and support Emera's 8-per-cent annual dividend growth target through 2020, Mr. Quezada said.
Now, on to my second pick. Shares of A&W Revenue Royalties Income Fund (AW.UN) have also dropped recently. But, like the chain's burgers and onion rings, the 5.2-per-cent yield is now too tempting to pass up. I'm ordering an additional 20 shares, bringing my position to 120.
There had been some concern that A&W's sales might have struggled in the fourth quarter, but on Tuesday the burger chain put those fears to rest. Same-store sales rose a healthy 3.1 per cent, on the heels of a 3.7-per-cent increase in the third quarter. Same-store sales at Tim Hortons, by comparison, rose just 0.1 per cent in the fourth quarter.
What's more, A&W announced that 45 new restaurants were opened in 2017, bringing the total number of locations to 918 as of Dec. 31. Growth of same-store sales and annual additions of restaurants to the "royalty pool" both increase the fund's royalty income, which in turn supports distribution increases. A&W last raised its distribution in October, and I expect to see more increases in the future.
Reinvesting dividends is one of the keys to building wealth. I especially like to reinvest my cash when stocks go on sale, because my dividend dollars stretch that much further.