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investor clinic

Having followed your model Yield Hog Dividend Growth Portfolio over the last couple of years, I have searched for but not found what sort of portfolio you would create today in light of COVID-19. I will have an inheritance coming up that I am hoping to layer in to dividend investments with a view to one day retiring.

I have not created a new portfolio and don’t plan to. The securities in my model portfolio (tgam.ca/dividendportfolio) are all strong businesses that I am confident will survive the current economic slump and continue to prosper in the years ahead.

I did recently sell one of the portfolio’s holdings – A&W Revenue Royalties Income Fund (AW.UN) – because it temporarily suspended distributions and no longer fits the criteria for inclusion in a dividend growth portfolio. But unless another company cuts its dividend, I don’t expect to make any other major changes.

I have, however, been reducing the portfolio’s risk by reinvesting dividends into stocks that I believe offer the highest degree of safety and potential for dividend growth in this highly uncertain environment. In May, for example, I increased my position in two largely regulated utilities – Fortis Inc. (FTS) and Emera Inc. (EMA).

Many of the portfolio’s other holdings – such as Algonquin Power & Utilities Corp. (AQN), Brookfield Infrastructure Partners LP (BIP.UN), Capital Power Corp. (CPX) and TC Energy Corp. (TRP) – will also likely continue to raise their dividends, according to analysts.

Some companies, such as the banks, won’t be in a rush to raise their payouts. But I’m willing to give them some slack as long as they maintain their dividends at current levels. Given the strong capital levels of the banks even after sharply higher loan-loss provisions in the second quarter, I don’t see any of the big banks’ dividends being at risk. That said, the 40-per-cent dividend cut in May by Laurentian Bank of Canada (LB) is a reminder that not all banks are immune.

Finally, to reiterate what I have said many times, the model portfolio is not intended as a template to be copied exactly. Rather, it is meant to be a source of ideas and to provide a real-time illustration of dividend investing in action. If you are planning to invest your inheritance, be sure to do your own research and consult other sources of information. You may also wish to explore other strategies such as index investing, which is a worthy approach on its own or in combination with a dividend growth strategy.

You mentioned recently that Bank of Montreal is now offering a 2-per-cent discount on shares purchased through its dividend reinvestment plan. How do I enroll in the DRIP and get the discount?

Bank of Montreal (BMO) isn’t the only bank offering a DRIP discount. When Toronto-Dominion Bank (TD) released quarterly results in May, it also announced a 2-per-cent discount on shares issued from its treasury under its DRIP. Both banks are hoping to attract more investors into their DRIPs, which are a convenient way for the banks to raise capital at a time when their earnings are under pressure from the economic ravages of the novel coronavirus.

There are two ways to sign up for a DRIP. The first is to enroll your shares in the company’s own DRIP through its transfer agent. The advantage of going this route is that every penny of your dividends will be reinvested, because company-operated DRIPs support the purchase of fractional shares. However, you will first need to ask your broker to register the shares in your name (for which there will be a fee) before you can enroll them with the transfer agent.

The second – and easier – way is to enroll your stocks with your discount broker’s DRIP. You can set this up with a phone call and there are no fees, but the downside is that broker-operated DRIPs do not support the purchase of fractional shares. This means that, when you reinvest your dividends, you can only purchase whole shares and will typically have some cash left over. You will also need to have sufficient shares in your account so that the dividends received are enough to purchase at least one new share, or the entire dividend amount will be received in cash.

Most discount brokers will honour DRIP discounts offered by companies such as BMO and TD, according to dripprimer.ca/canadiandiscountbrokers. However, before taking the plunge, you should verify this with your own broker.

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.

Special to The Globe and Mail

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