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investor clinic

Today, I’ll review how my model Yield Hog Dividend Growth Portfolio performed in 2021. Then, I’ll offer a few thoughts on what 2022 may hold for dividend investors.

To refresh everyone’s memory, I launched my model portfolio on Oct. 1, 2017, with $100,000 of virtual cash (tgam.ca/dividendportfolio). My goal was to identify solid, growing companies with a history of raising their dividends and a high probability of continuing to do so.

The money in the model portfolio isn’t real, but I follow the same dividend growth strategy in my personal accounts where I own all of the same stocks, plus a few others. In both cases, to improve diversification, I also supplement my individual stock holdings with Canadian and U.S. index exchange-traded funds. So, you could say my money is where my mouth is.

I’m pleased to report that, in 2021, the model portfolio continued to achieve its primary goal of churning out a growing stream of income. Of the 20 companies in the portfolio, all but two – SmartCentres REIT (SRU.UN) and Choice Properties REIT (CHP.UN) – raised their payouts. The two ETFs – the iShares Core Dividend Growth ETF (DGRO) and the iShares S&P/TSX 60 Index ETF (XIU) – also paid higher distributions in 2021 compared with 2020.

Among individual stocks, Manulife Financial Corp. (MFC) was especially generous, hiking its dividend by 18 per cent. The same was true of the four banks in the portfolio, which raised their payouts by an average of 15 per cent. As expected, banks and insurers announced the increases after the Office of the Superintendent of Financial Institutions lifted its moratorium on dividend hikes that had been in place since the early days of the pandemic.

Everyone loves a juicy dividend increase, but it’s only when you step back and look at the cumulative effect of multiple increases that you can truly appreciate the power of dividend growth. My portfolio is proof of that. At its inception a little more than four years ago, it was generating annualized income of $4,094 based on dividend rates at the time. Now, thanks to dozens of dividend increases and regular reinvestments of cash over the years, the portfolio’s projected annual income has grown to $6,285 – an increase of more than 53 per cent.

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I don’t know about you, but my employment income didn’t rise by that much.

But dividends are just one component of a portfolio’s return. The other, typically larger, component is capital growth. Combining the two gives you the portfolio’s total return.

As of Dec. 15, my model portfolio’s value had grown to $150,966, representing a total return of about 51 per cent since inception, or 10.3 per cent on an annualized basis. For 2021, the portfolio returned 20.2 per cent, which – barring some last-minute stock market drama – represents the second-best annual return since the portfolio’s 26.7-per-cent gain in 2019.

I’m happy with that performance, but I’m not crowing about it. Over the same span of more than four years, the S&P/TSX Composite Index posted a total return of 50.9 per cent – about one-tenth of a percentage point behind the model portfolio. So, an investor who simply bought the index would have fared just as well, albeit with a slightly lower contribution from dividends and a higher contribution from capital growth.

What does 2022 hold? Well, I’m expecting most of the stocks and ETFs in the portfolio to continue raising their payouts, but the pace of dividend growth will almost certainly slow.

TC Energy Corp. (TRP), for example, recently reduced its dividend growth guidance to a range of 3 per cent to 5 per cent annually, down from 5 to 7 per cent. The pipeline company said the move will allow it to fund more of its aggressive growth plans with internal cash flow. Similarly, analysts expect that Algonquin Power & Utilities Corp. (AQN) will throttle back its dividend growth to about 6 per cent in 2022, down from 10 per cent in previous years. Capital Power Corp. (CPX) is targeting dividend growth of 5 per cent annually for the next few years, down from previous increases of 7 per cent. Several other companies, including Enbridge Inc. (ENB), Canadian Utilities Ltd. (CU) and Restaurant Brands International Inc. (QSR), have been less generous with their dividend increases recently.

Another concern is rising interest rates. With inflation surging and central banks expected to raise interest rates in 2022, utilities, power producers and other rate-sensitive stocks could take a hit. However, history has shown that dividend stocks often recover after an initial, rate-driven decline. What’s more, bank stocks could benefit because rising rates improve their net interest margins.

The Omicron COVID-19 variant adds yet another layer of uncertainty. Rather than make any major changes to my model portfolio, however, I plan to wait out the storm while continuing to collect my dividends. They are one thing I can count on in this unpredictable environment.

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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