Lately, I’ve been hankering for a Teen Burger and onion rings. Problem is, my local A&W has been closed for weeks because of the coronavirus.
Not only is A&W unable to answer my cravings for greasy food, but it’s no longer satisfying my hunger for dividends, either. With 220 of its nearly 1,000 locations closed, and the rest offering only drive-through, delivery or mobile order and pickup, A&W Revenue Royalties Income Fund (AW.UN) suspended distributions on March 31.
I love A&W’s burgers and I believe it’s one of the best-managed fast-food chains in Canada. But with no clear timeline as to when its restaurants will reopen or when distributions will resume – or at what level – the units no longer qualify for inclusion in my model Yield Hog Dividend Growth Portfolio. So, reluctantly, I’ve decided to sell.
Before I announce how I’ll be spending the proceeds, I’ll quickly review how the model portfolio has performed in light of the unprecedented economic and social disruption we’ve been living through.
First, the good news: I’m still outperforming the index. As of April 30, the portfolio was worth $111,617.49 (in virtual dollars) – up 11.6 per cent from an initial value of $100,000 at inception on Oct. 1, 2017. This represents an annualized total return of 4.3 per cent, compared with an annualized total return of 2.5 per cent for the S&P/TSX Composite Index over the same period. (All return figures include dividends.)
The bad news is that the portfolio didn’t escape the market carnage. Year-to-date through April 30, the portfolio was down 11.6 per cent. Still, that’s slightly better than the total return of negative 12.4 per cent for the S&P/TSX Composite. It also beats the year-to-date total return of negative 21.7 per cent for the S&P/TSX Canadian Dividend Aristocrats Index and negative 14 per cent for the Dow Jones Canada Select Dividend Index.
I’m also pleased to report that, with the exception of A&W, the rest of the companies in my model portfolio have maintained their dividends.
Now, it’s time to reinvest some of my cash.
The sale of my 120 AW.UN units generated proceeds of $3,217.20, based on Tuesday’s closing price of $26.81. Combined with the portfolio’s cash balance of $1,476.55 at the end of April, I have $4,693.75 of spending power.
Given the tremendous uncertainty we’re facing – will there be a second pandemic wave? how long will the economy be in recession? – I believe it’s prudent to focus on dividend investments that offer a relatively high degree of safety.
Utilities have held up comparatively well during the market turmoil. Analysts expect that their dividends will be maintained – and, in many cases, continue to increase – even as some utilities may scale back growth plans should the pandemic persist.
“The economic fallout of COVID-19 will affect utility companies. That said, the impact will likely be minor,” analyst Elias Foscolos of Industrial Alliance Securities said in a recent note.
With these thoughts in mind, I’ve decided to increase my portfolio’s utility exposure by “purchasing” an additional 40 shares each of Fortis Inc. (FTS) and Emera Inc. (EMA), for a total of 140 and 155 shares, respectively. Based on Tuesday’s closing prices, the purchases will cost a total of $4,394.80.
Fortis is a natural pick. With 99 per cent of its earnings coming from regulated gas and electric assets and an annual dividend growth record that stretches back more than four decades, the stock – which currently yields 3.5 per cent – should provide some stability in the uncertain times ahead. Mr. Foscolos noted that Fortis has a conservative dividend payout ratio of 72 per cent of earnings per share, “providing safety and leaving more than ample room for dividend growth,” which the company has targeted at 6 per cent annually through 2024.
Emera – which yields 4.4 per cent – is targeting annual dividend growth of 4 per cent to 5 per cent through 2022. Both utilities are in the midst of multibillion-dollar capital spending programs that will increase their rate bases – the value of assets on which utilities are permitted to earn a regulated rate of return – and support their dividend growth objectives.
One other portfolio housekeeping note: I’ve decided to sell my 12 shares of Brookfield Infrastructure Corp. (BIPC) and buy 12 additional units of Brookfield Infrastructure Partners LP (BIP.UN). BIPC has been trading at a premium to BIP.UN, even though the two securities will pay the same dividend/distribution, so this seemed to be a good time to simplify the portfolio.
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