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investor clinic

Now that we’ve passed the halfway point of 2023, let’s check in with my model dividend portfolio. First, I’ll recap the portfolio’s mandate and performance. Then, I’ll discuss how I’m reinvesting the cash that’s accumulated in recent months.

As you’ll see, my portfolio has developed something of a split personality lately, with dividends continuing to grow but share prices coming under pressure from the sharp rise in interest rates.

I launched my model Yield Hog Dividend Growth Portfolio on Oct. 1, 2017, with $100,000 of virtual cash. My goal was to identify companies with a strong track record of raising their dividends and a high probability of continuing to do so.

As a buy-and-hold investor, I vowed to do very little trading and to instead focus on reinvesting my dividends to maximize the benefits of compounding.

No strategy is perfect, and I’ve had to jettison a couple of companies that ran into trouble and reduced their dividends, disqualifying them from membership. But the vast majority of the original stocks are still in the portfolio and raising their dividends regularly. (View the complete portfolio online at tgam.ca/dividendportfolio.)

The combination of dividend growth and regular dividend reinvestment – which I do manually whenever a significant amount of cash builds up – has produced substantial growth in income for the portfolio, in line with its primary mission to generate increasing cash flow.

At inception, the portfolio was generating annualized income of $4,094, based on dividend rates at the time. Fast-forward nearly six years, and it’s now throwing off a projected $7,024 of cash annually – an increase of nearly 72 per cent.

Even in the face of inflation and surging interest rates, more than half of the companies in the portfolio have already raised their dividends this year – namely, Bank of Montreal BMO-T, BCE Inc. BCE-T, Brookfield Infrastructure Partners LP BIP-UN-T, Canadian Imperial Bank of Commerce CM-T, Canadian Utilities Ltd. CU-T, Choice Properties REIT CHP-UN-T, CT REIT CRT-UN-T, Manulife Financial Corp. MFC-T, Restaurant Brands International Inc. QSR-T, Royal Bank of Canada RY-T, TC Energy Corp. TRP-T and Telus Corp. T-T. And I expect most of the remaining stocks will deliver hikes in the second half of the year.

Now, I would be lying if I said everything is going peachy. Even as dividends are rising, shares prices of many dividend stocks have been struggling. That’s typically what happens, at least temporarily, when interest rates rise.

This is apparent in the portfolio’s performance. As of July 1, the portfolio was worth $149,565, representing a total return of about 49.6 per cent since inception. That trails the total return of about 53.7 per cent for the benchmark S&P/TSX Composite Index over the same period. Through the first six months of 2023, the portfolio’s total return of 3.8 per cent also lagged the index’s return of 5.7 per cent. (All return figures cited here include dividends.)

Am I upset? Not really. There have been times when my model portfolio has outperformed the index, and now we’re in a period when it’s underperforming. No big whoop. I prefer to look on the bright side, which is that I can now purchase some stocks at lower prices compared with a few months ago and generate more income for every dollar I invest.

With that in mind, let’s do some shopping.

Many real estate investment trusts are feeling the pinch from the steep increase in interest rates. In addition to increasing REITs’ borrowing costs, rising rates have caused their unit prices to fall, which has made their yields – which move in the opposite direction – more competitive with the higher returns now available from bonds and guaranteed investment certificates.

Two of the portfolio’s REITs – Choice Properties REIT and SmartCentres REIT SRU-UN-T – have been hit especially hard, dropping about 9 per cent and 8 per cent, respectively, year to date. Still, nothing has fundamentally changed in the long-term outlook for either REIT.

Both have solid tenants, with Choice’s portfolio anchored by grocery and drug stores in the Loblaw family and SmartCentres benefiting from its relationship with Walmart, which accounts for more than one-quarter of rental revenue. Occupancy levels also remain high, at more than 97 per cent for both REITs. What’s more, Choice and SmartCentres have deep development pipelines that include retail, residential and industrial properties.

With Choice and SmartCentres now yielding 5.6 per cent and 7.6 per cent, respectively, I’ve decided to purchase an additional 40 units of each REIT. In total, the model portfolio now holds 500 Choice units and 190 SmartCentres units. (Note: These purchases were completed at Thursday’s closing prices and consumed $1,513.60 of the portfolio’s “cash.”) The money in the model portfolio isn’t real, but I also own Choice and SmartCentres personally – along with all of the other stocks in the model portfolio – so I have skin in the game.

Nobody knows what will happen to REIT unit prices in the short run, but over the long run I expect that Choice and SmartCentres will both continue to expand their real estate portfolios and generate growing cash flow. In the meantime, I’m happy to sit back and collect my distributions while I wait for interest rates to crest and income stocks to start moving higher again.

Remember to do your own due diligence before investing in any security.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 21/05/24 4:00pm EDT.

SymbolName% changeLast
BMO-T
Bank of Montreal
-0.35%129.17
BCE-T
BCE Inc
-1.15%46.22
BIP-UN-T
Brookfield Infra Partners LP Units
-0.98%41.29
CM-T
Canadian Imperial Bank of Commerce
-0.33%67.02
CU-T
Canadian Utilities Ltd Cl A NV
+0.25%31.92
CHP-UN-T
Choice Properties REIT
-0.53%13.04
CRT-UN-T
CT Real Estate Investment Trust
-0.29%13.63
MFC-T
Manulife Fin
+0.17%36
QSR-T
Restaurant Brands International Inc
-2.32%94.21
RY-T
Royal Bank of Canada
-0.56%144.53
TRP-T
TC Energy Corp
+0.93%53.44
SRU-UN-T
Smartcentres Real Estate Investment Trust
-0.04%22.9
T-T
Telus Corp
-0.93%22.38

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