At the start of the year, I predicted that most of the companies in my model portfolio will raise their dividends in 2020.
Well, we’re off to a very good start.
Less than two months into 2020, seven of the portfolio’s 20 companies (there are also two exchange-traded funds) have announced dividend hikes. For those keeping score at home, the companies (and their percentage dividend increases) are: BCE Inc. (ticker symbol BCE; 5 per cent), Brookfield Infrastructure Partners LP (BIP.UN; 7 per cent), Canadian Utilities Ltd. (CU; 3 per cent), Manulife Financial Corp. (MFC; 12 per cent), Restaurant Brands International Inc. (QSR; 4 per cent), Royal Bank of Canada (RY; 3 per cent) and TC Energy Corp. (TRP; 8 per cent).
Dividend growth is the core of my investing strategy. When a company hikes its payout, it’s doing two things. First, it’s putting more money into investors’ pockets, which increases their spending power and counters the effects of inflation. Second – and just as important – a dividend hike signals that the company is confident about the future. I never try to guess what stocks will do in the short run, but over the long run share prices of companies that boost their dividends tend to rise, providing capital gains on top of growing income.
My model Yield Hog Dividend Growth Portfolio (tgam.ca/dividendportfolio) is proof of that. Through Feb. 20, the portfolio has posted a total return – from capital growth and dividends – of about 36 per cent since inception on Oct. 1, 2017. That tops the total return of about 23.3 per cent for the S&P/TSX Composite Index over the same period. The model portfolio, which started with $100,000 of virtual funds, is now worth $135,982 and is generating projected annualized income (based on current dividend rates) of $5,308, up 29.7 per cent since inception.
Reinvesting dividends is another key component of my investing strategy, and today I’ll be deploying most of the more than $2,000 in cash that has accumulated recently.
Finding bargains in the stock market has become a challenge after the recent run-up in share prices. As stock prices have climbed, dividend yields have dropped, which means every new dollar invested generates less income than it used to. I don’t see a lot of compelling value in the 22 securities I already hold in the model portfolio, so I’ve decided to go “off the board” and add 65 units of a security I believe is still attractively priced – namely SmartCentres Real Estate Investment Trust (SRU.UN).
SmartCentres REIT (which I also own personally) is best known for its 170 retail shopping centres, most of which are anchored by a Walmart, a rock-solid tenant that accounts for about 25 per cent of the REIT’s revenue. Walmart’s strength notwithstanding, SmartCentres’ focus on the retail sector – and its exposure to chains such as Payless Shoes and Bombay/Bowring that have gone under in recent years – is a big reason the units have struggled even as other types of REITs have been surging.
That’s the bad news. The good news is that SmartCentres’ occupancy rate is still strong at 98.1 per cent. What’s more, SmartCentres is transforming itself into more than a retail REIT; it has an extensive pipeline of development projects that includes condo and apartment towers, offices, self-storage facilities and retirement residences. Some of these projects are expected to start contributing meaningfully to the REIT’s bottom line in 2020-21. In the meantime, investors get “paid to wait” with an attractive yield of 5.9 per cent.
Another plus is SmartCentres’ valuation. At a time when many other REITs trade at a premium to their net asset value (NAV is essentially the market value of REIT’s properties minus debt), SmartCentres trades about 5 to 7 per cent below analysts’ NAV estimates.
Analysts are generally favourable on SmartCentres, with four buy ratings, four holds and no sells, according to Refinitiv. The average price target is $34.31. The units closed Friday at $31.48 on the Toronto Stock Exchange.
“With a defensively positioned Walmart-anchored portfolio, near-term AFFO [adjusted funds from operations] and NAV growth set to improve, a substantial long-term value-creation opportunity and discounted valuation, we continue to see a decent entry point,” RBC Dominion Securities analyst Pammi Bir said in a recent note. He reiterated an “outperform” rating and $36 price target on the units.
In keeping with my dividend growth approach, I also like the fact that SmartCentres has been raising its distribution annually for the past six years – a trend I expect will continue. The distribution is also well-covered, thanks to a payout ratio that analysts estimate at about 80 to 85 per cent of projected AFFO for 2020. (AFFO is a cash-flow measure that includes maintenance capital spending and is considered more conservative than funds from operations, or FFO.)
I’m not expecting a quick return from SmartCentres. But over the long run I’m confident it will deliver a nice combination of distribution increases and capital growth as its pipeline of new projects start churning out cash.
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