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investor clinic

Following last week’s column about my model dividend portfolio, readers filled my inbox with questions. Today, I’ll answer some of your queries.

What criteria do you use when looking for new stocks for your model Yield Hog Dividend Growth Portfolio? Or do you stick with a short list of the old standards such as banks and utilities?

As a buy-and-hold investor, I’ve made only a handful of changes in the model portfolio since its inception in 2017. Three of the original 22 securities are gone – Pizza Pizza Royalty Corp., A&W Revenue Royalties Income Fund and Algonquin Power and Utilities Corp. – and two have been added – Restaurant Brands International Inc. and SmartCentres Real Estate Investment Trust. Another original member, Canadian REIT, was replaced by Choice Properties REIT when they merged in 2018.

Apart from those trades, I’ve focused on reinvesting my dividend income in the portfolio’s existing names, which include banks, utilities, power producers, pipelines, telecoms and REITs. Unlike a dividend reinvestment plan (DRIP) that buys additional shares automatically, I let my cash accumulate and reinvest it when a particular stock’s valuation looks attractive. (Nothing against DRIPs; I just like having more control over the reinvestment process.) Consistent with the portfolio’s primary mission of generating a high and growing income, I look for stocks with above-average dividend yields, a track record of increasing those dividends and a high probability of continuing to do so. I also focus on stocks with wide “moats” – competitive advantages.

It would be interesting to know what the effective yield of the portfolio is after taking into account the dividend tax credit. Can you share that?

Before tax, the portfolio yields about 4.85 per cent, which is the sum of all dividends and distributions on an annualized basis, divided by the portfolio’s current market value. However, it’s not possible to state the after-tax yield, because it will vary widely depending on a person’s total taxable income, province of residence and the tax characteristics – which vary from year to year – of the REITs in the portfolio.

What I can say is that, especially at low income levels, dividends are taxed very favourably thanks to the dividend tax credit. In Ontario, for example, a person with total taxable income of $55,867 or less will have a negative tax rate on dividends. The DTC is a non-refundable credit, which means the government won’t send you a cheque for the negative amount. But you can use it to offset other taxes owing.

Even at higher income levels, tax rates on dividends are still very attractive in many provinces. A person living in British Columbia with income of $100,000, for example, would have a marginal tax rate of just 5.49 per cent on eligible dividend income, compared with 31 per cent on interest, employment or other income. To determine the marginal tax rate on dividend income for your province and income level, check out the combined federal and provincial tax tables at

You mentioned that the model portfolio’s annualized total return is about 6.8 per cent since inception on Oct. 1, 2017, compared with the S&P/TSX Composite Index’s annualized total return of about 8.1 per cent over the same period. Why not just invest in the index?

You certainly could. In fact, I often remind readers that index investing is a worthy strategy, either alone or in combination with dividend stocks. In my personal portfolio – which, unlike the model portfolio, uses real money – I hold several Canadian and U.S. index exchange-traded funds to enhance diversification and provide exposure to sectors, such as technology, that aren’t known for paying big dividends, but have produced strong returns in recent years.

That said, it’s worth pointing out that the recent sharp rise in interest rates has weighed on the performance of dividend stocks. Prior to starting my current model portfolio, I managed a similar dividend portfolio as part of The Globe and Mail’s Strategy Lab series. Over its five-year run, that portfolio posted an annualized total return of 11.6 per cent, handily beating the S&P/TSX Composite Index’s annualized total return of about 7.2 per cent over the same period.

With bond yields now falling and the Bank of Canada expected to cut interest rates several times this year, I’m hopeful that dividend stocks will regain their mojo.

However, even when dividend stocks are underperforming – as all asset classes do on occasion – they still have a big advantage: By paying you cash during good times and bad, they reward you for staying invested. This is critical for long-term investing success, and it’s especially important during periods of market turbulence when you might be tempted to sell and go to cash. Dividends aren’t free money – they come out of a company’s earnings – but there’s nothing like receiving reliable and growing dividend income to soothe your frayed nerves and keep you on course.

You have nearly $2,800 of cash sitting in the portfolio. How are you planning to invest it?

When I make a purchase or sale, I always disclose it in my column. I expect to deploy most of that cash in the next few weeks, so stay tuned.

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

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