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investor clinic

Pedestrians pass the New York Stock Exchange, Jan. 27, 2021, in New York.John Minchillo/The Associated Press

I just finished reading your April 10 update about your model Yield Hog Dividend Growth Portfolio. To me the praise for the strategy is skewed and disingenuous. Since October, 2017, the portfolio is up about 38 per cent on a total return basis, while the S&P 500 is up 74 per cent. There are people following the advice from this strategy who have left huge gains on the table. Do an honest comparison so people can make the best decisions with their money.

Yes, the S&P 500 has left my model portfolio in the dust in recent years. I’ve been quite open about that: Google “Why I’m not giving up on dividends – and you shouldn’t either.” But I’m glad you brought it up, because it gives me a chance to remind readers of a few points I have raised in previous columns.

First, the model dividend portfolio is not meant to be a template for people to copy exactly (tgam.ca/dividendportfolio). Rather, its purpose is to provide investment ideas and a real-time illustration of dividend growth investing in action. There are lots of great dividend stocks that aren’t included in the portfolio – I’ve written about many of them over the years – and I encourage people to cast their nets widely.

Second, I always encourage dividend investors to diversify with exchange-traded funds, including those that track the S&P 500, which provides exposure to key sectors such as technology and health care that are underrepresented in Canada. In my personal portfolio, I hold the BMO S&P 500 Index ETF (ZSP), which trades in Canadian dollars and has a management expense ratio of just 0.09 per cent, but there are many other good options.

Third, as I’ve said many times, one reason I’m a fan of dividend growth stocks is that they provide a degree of stability and predictability, which can help to soothe an investor’s nerves during tumultuous times. When markets are volatile, receiving regular dividends – and dividend increases – can help people stay the course. What’s more, many dividend growth stocks – such as utilities, power producers and Canadian banks – are on the conservative end of the spectrum, which appeals to risk-averse investors.

By holding a core portfolio of dividend growth stocks – and diversifying with ETFs – investors can get the benefits of dividends without missing out on the gains from other sectors. An all-ETF portfolio is also a great option for investors who aren’t comfortable owning individual stocks.

I always enjoy reading your columns but don’t always agree with you. Your model Yield Hog Dividend Growth Portfolio is constantly reinvesting dividends. What you really have is a capital growth fund that does not pay out dividends. You would do better if you just concentrated on lower-yielding, higher-growing companies such as Canadian Pacific Railway Ltd. (CP) and Canadian National Railway Co. (CNR), which have produced much better returns than your model portfolio.

Actually, I would have done even better if I had put my entire life savings into Shopify Inc. (SHOP). But identifying, in hindsight, companies that produced extraordinary returns isn’t really helpful. Here’s the thing: For every CP, CNR and SHOP, there are growth-oriented stocks that crushed the market for years and then hit a wall.

Dollarama Inc. (DOL), to take one example, posted an annualized return of 40.5 per cent for the five years ended Dec. 31, 2017. Since then, however, its annualized gain has shrunk to 3.6 per cent. I’m not saying railway stocks are heading for a similar fate – they could keep chugging higher for all I know – but it’s worth remembering the old saying: Past returns are no guarantee of future results.

In my model portfolio, I focus on companies that offer a combination of above-average yields and potential for dividend and capital growth. Many of these stocks – Algonquin Power & Utilities Corp. (AQN), Brookfield Infrastructure Partners LP (BIP.UN), Capital Power Corp. (CPX) and Canadian Apartment Properties REIT (CAR.UN), among them – have done exceptionally well. There will always be stocks that do even better, but that’s no reason to change my approach.

On the T5013 tax slip for my Brookfield Infrastructure Partners LP (BIP.UN) units, there are two box 135s (foreign dividend and interest income) labelled as BMU (Bermuda) and USA (United States), respectively. Am I to assume that the funds in boxes are in Bermuda and U.S. dollars, in which case I would need to convert to Canadian currency for my tax return? My broker has not given me a definitive answer.

Your broker – not Brookfield Infrastructure – issued the T5013 and should be able to answer your question. But since your broker seems to be confused, I checked with Dorothy Kelt at TaxTips.ca.

The country codes BMU and USA refer to the origin of the foreign dividend and interest income, not to the currency. The amounts in box 135 are typically reported in Canadian dollars, unless a different “functional currency” is specified in box 205 of the T5013, Ms. Kelt said. “If there is no code in box 205, then everything is in Canadian dollars,” she said.

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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