First, the bad news about my model Yield Hog Dividend Growth Portfolio: Nearly seven months after the portfolio’s launch, it’s down about 2 per cent, including dividends.
The good news? Even during a rocky period for the stock market – and for dividend stocks in particular – the portfolio’s dividend income has continued to grow.
At inception on Sept. 30, the portfolio – which started with $100,000 in virtual dollars – was generating annualized income of $4,094. Since then, 17 of the 22 stocks – including both exchange-traded funds – have boosted their dividends.
Thanks to those increases, and regular dividend reinvestment, the portfolio’s annualized income has grown to $4,369 – up about 6.7 per cent. And I have no doubt that the portfolio’s dividend income will continue to grow in the months and years ahead.
As I’ve said before, the point of the model portfolio isn’t to provide a template for people to copy exactly, as there are lots of great dividend stocks that I didn’t include. Rather, the purpose is to provide a real-time illustration of the dividend-growth strategy in action.
As much as I don’t like to see my portfolio fall in value – I also own all of the stocks personally – watching my dividend income grow makes it easier to ride out periods of market volatility such as those we’ve had lately.
Reinvesting dividends is an integral part of the strategy because it harnesses the power of compounding. With that in mind, today I’ll be putting some of my cash to work.
Pipelines stocks might seem like the last place investors should be parking new money, with the combination of rising bond yields and growing environmental and political opposition posing major challenges to the industry. Enbridge Inc., for example, is the worst-performing stock in the model portfolio, having tumbled about 27 per cent since inception, excluding dividends.
Given the uncertainties facing Enbridge’s capital project funding and the fate of its proposed Line 3 replacement in Minnesota, I won’t be adding to my position right now. I still expect Enbridge will manage through its short-term challenges, but investors (many of whom have asked me about the company) will have to weigh the risks and make their own decision.
I have a higher comfort level with fellow pipeline operator TransCanada Corp., which is why I have decided to spend most of the cash in my model portfolio to acquire another eight shares of the company (bringing my total position to 88 shares).
With the 10-year U.S. Treasury yield topping 3 per cent on Tuesday for the first time since January, 2014, and Canadian government bond yields also rising sharply in the past year, interest-sensitive stocks such as pipelines have taken it on the chin. TransCanada’s shares fell 59 cents or 1.1 per cent to close at $55.02 on the Toronto Stock Exchange on Tuesday and have skidded more than 10 per cent since the portfolio’s inception.
But TransCanada’s dividend yield, which moves in the opposite direction to its price, is now at about 5 per cent. I consider that attractive, given that the company – which has raised its dividend for 18 consecutive years – is aiming to continue growing its payout at an annualized rate of 8 per cent to 10 per cent through 2021, supported by about $23-billion of small- and medium-sized projects.
Trading at less than 16 times estimated 2019 earnings per share – compared with 15 to 18 times for the peer group – TransCanada’s shares are a good value, RBC Dominion Securities analyst Robert Kwan said in a recent note in which he reiterated an “outperform” rating and $76 price target.
“We believe that TRP’s shares should trade at a premium (let alone a discount) given its superior growth profile … and more favourable free cash flow profile,” Mr. Kwan said.
He also cited TransCanada’s “conservative” dividend coverage, strong credit ratings and the fact that growth is “being driven by smaller projects that have a high degree of likelihood that they will move forward. Even if one or two projects fall away, we believe that the company can still achieve its targeted growth rate range.”
Mr. Kwan is far from the only analyst who’s bullish on TransCanada. According to Bloomberg, there are 18 buy recommendations, three holds and no sells. The average 12-month price target is $67.96 – more than 23-per-cent higher than current levels.
There are no guarantees that TransCanada’s shares will rebound in the short run. But I’m confident that the dividend will continue to grow through 2021 – and likely beyond – and that eventually the share price will move higher as well.
View John Heinzl’s model Yield Hog Dividend Growth Portfolio here.
John Heinzl