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investor clinic

Today, I’ll briefly review my model dividend portfolio’s performance. Then I’ll discuss how I am reinvesting most of the cash that’s accumulated over the past few months.

Launched on Oct. 1, 2017, with $100,000 of virtual money, the model Yield Hog Dividend Growth Portfolio finished August with a value of $148,969.18. That represents a total return – from share price gains and dividends – of nearly 49 per cent, or about 10.7 per cent on an annualized basis.

I’m pleased with that performance, but I’m not gloating. Over the same nearly four-year period, the S&P/TSX Composite Index has posted a total annualized return of 10.6 per cent, so it’s basically a dead heat.

When it comes to the portfolio’s core mission of dividend growth, however, the results have been especially gratifying. When the portfolio started, it was generating about $4,094 of annualized income based on dividend rates at the time. Now, thanks to dozens of dividend increases and regular reinvestments of cash, the portfolio’s projected annualized income has grown to $5,937 – an increase of 45 per cent.

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Even during the pandemic, the dividend hikes have kept on coming. So far this year, I’ve received “raises” from nine companies: Algonquin Power & Utilities Corp. , BCE Inc. , Brookfield Infrastructure Partners LP , Canadian Apartment Properties REIT, Capital Power Corp. , Canadian Utilities Ltd. , Restaurant Brands International Inc. , Telus Corp. and TC Energy Corp. .

Before the end of the year, I expect to see increases from several more stocks, including Emera Inc. , Enbridge Inc. and Fortis Inc. . What’s more, as soon as the Office of the Superintendent of Financial Institutions lifts its moratorium on dividend increases, I’ll be looking for the four Canadian banks in the portfolio to raise their payouts, perhaps substantially.

With copious amounts of cash sitting on banks’ balance sheets after a series of strong quarters, analysts say bank dividend hikes are overdue.

“The two most critical measures of financial strength – earnings and capital – have never been higher for the Canadian banks,” Rob Wessel, managing partner with Hamilton ETFs, said in a recent note. “The case for allowing a resumption of dividend increases is overwhelming.”

OSFI is taking a cautious position, however, amid predictions of a potentially severe fourth wave of COVID-19 as fall weather looms. Unless the banks increase dividends in the middle of a quarter, which would be unusual, investors will likely have to wait at least until the banks’ fiscal fourth-quarter reporting season begins in late November, Mr. Wessel said.

“On the bright side, the longer OSFI waits, the larger the eventual increase will be,” he said.

How big will those bank dividend increases be? With dividend payout ratios having fallen, on average, to about 37 per cent of core earnings – below the typical target range of 40 per cent to 50 per cent – some analysts expect to see double-digit increases when OSFI finally gives the green light.

With that in mind, today I’m announcing two purchases.

First, I’ve added 10 shares of Toronto-Dominion Bank , bringing my total to 80 shares. TD’s common equity tier 1 (CET1) capital ratio – a measure of financial strength – is 14.5 per cent, which is the highest among the big Canadian banks. This capital buffer gives TD “enhanced flexibility to deliver above-average dividend growth and share buybacks” as well as potential mergers and acquisitions, Scott Chan, analyst with Canaccord Genuity, said in a note after the bank’s third-quarter earnings.

For my second purchase, I’ve added 10 shares of Royal Bank of Canada , for a total of 60 shares. Like TD, Royal also has a strong capital position that could lead to above-average dividend increases and share buybacks, Mr. Chan said. (Both purchases were executed at Tuesday’s closing prices and together consumed $2,115.30 of cash. The additional shares are reflected in the latest model portfolio update.)

Given investors’ enthusiasm for bank dividend hikes, I wouldn’t be surprised to see bank stocks rally when the moratorium is lifted. That’s why I’m buying now – and avoiding the rush.

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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