It’s great to be a buy-and-hold investor in a bull market. You can just sit back and watch as the value of your portfolio increases a little more each month.
Bear markets are another matter. It’s stressful to see your hard-earned profits melting away each month as the markets slip to even lower lows. Bear markets are the real test of whether you can stick to a buy-and-hold philosophy or cave to market pressure.
My Internet Wealth Builder Buy and Hold Portfolio, which this month celebrates its 10th anniversary, is a testimony to why sticking to the plan through good times and bad will pay off. Despite some slippage in the latest review period, the portfolio shows an average annual compound rate of return of 11.43 per cent since it was launched a decade ago.
The portfolio has one basic goal – invest in great stocks and then hold on to them, no matter what the market is doing. The underlying thesis is that the long-term trend of the markets is up. If you own good stocks, they’ll move with it.
The portfolio consists mainly of Canadian and U.S. blue-chip stocks that offer long-term growth potential. It also has a bond ETF holding. The original weighting was 10 per cent for each stock with the bond ETF starting with a 20-per-cent position. That has now been reduced because equity increases have outpaced the bond market.
I used several criteria to choose the stocks. These included a superior long-term growth profile, industry leadership, a good balance sheet, a history of dividend increases, and relative strength in down markets.
The objective is to generate decent cash flow (all the stocks but one pay dividends), minimize downside potential, and provide slow but steady growth. The target rate of return was originally set at 8 per cent annually.
These are the securities we hold with comments on how they performed since my last review in December. Prices are as of the afternoon of June 23.
iShares Canadian Universe Bond Index ETF (XBB-T). This is not a good time for bonds, to put it mildly. In fact, this is the worst bear market in bonds I have seen since I began my career as a financial writer in the late 1980s. As of the close on June 22, this fund was down 13.54 per cent year-to-date. That’s almost unheard of for a universe bond fund and unfortunately the pattern is likely to continue for some months yet. But bonds or their proxies are an essential part of a long-term portfolio, so we have to accept the losses and wait for the inevitable turnaround. The price is down $4.12 per unit since the last review in December. We received distributions totalling 39.6 cents per unit.
BCE Inc. (BCE-T). BCE shares are down $3.36 since the last update. Because of timing we received three dividends during the period for a total of $2.715 per share.
Brookfield Asset Management (BAM.A-T). After several years of steady gains, Brookfield was hard-hit in the market sell-off, with shares losing $16 in the latest six-month period. Despite the retreat, the shares still look a little pricey with a p/e ratio of 18.29. We received two dividends for a total of 27 US cents a share.
Canadian National Railway Co. (CNR-T). CN has been a strong performer for us, but a falling tide lowers all boats. The stock is down $23.05 (14 per cent) since our last review. Because of timing we received three dividend payments totalling $2.081.
Enbridge Inc. (ENB-T). Here’s a change of pace. Enbridge shares are actually up in the latest period as pipeline companies are holding their own in the market retreat. The shares are ahead $4.30 (9 per cent) since the last review. We received two dividend payments for a total of $1.72 per share. The quarterly dividend was raised 3 per cent effective with the February payment.
Toronto Dominion Bank (TD-T). TD raised its dividend by 13 per cent effective in January, but the stock pulled back with the rest of the financial sector, losing $12.49 (almost 13 per cent) per share. We received two dividend payments at the new rate of 89 cents per quarter for a total of $1.78 per share.
Alphabet Inc. (GOOGL-Q). When a stock is priced in the thousands, any pullback hurts. In this case, the shares are down a whopping $614.48 since the last review, as the tech sector suffered a major correction. The decline brought the p/e ratio back to a more reasonable 20.3, which may limit further downside. This is the only stock in the group that does not pay a dividend.
UnitedHealth Group Inc. (UNH-N). Another winner. They’re rare right now. This is the top health insurer in the U.S. and the No. 1 performer in our portfolio, with a total return of almost 370 per cent. The shares gained US$59.79 (13.6 per cent) since our last review. We received three dividends due to timing, for a total of US$4.55 per share. The quarterly pay-out was raised by 20 US cents a share (13.8 per cent) to US$1.65, effective with the June payment.
Walmart Inc. (WMT-N). Walmart didn’t do much of anything during the period. The shares dropped US$1.44. We received one quarterly dividend of 55 US cents per share.
Cash. At the time of the last review, we had cash and retained earnings totaling $3,483.40. We held the money in an EQ Bank Savings Plus Account, which was paying 1.25 per cent. We earned interest of $25.40.
Here is the status of the portfolio as of June 23. For consistency, the Canadian and U.S. dollars are shown at par. Trading commissions are not factored in, although in a buy and hold portfolio they are not significant in any event.
Comments: The new portfolio value (market price plus retained dividends/distributions) is $147,368.92. That compares to $161,269.71 at the time of the last review, for a loss of 8.6 per cent.
The only two winners during the latest period were UnitedHealth and Enbridge. The biggest loser in absolute dollars was Alphabet.
Since inception, we have a total return of 195.1 per cent. That represents an average annual compound growth rate over 10 years of 11.43 per cent. I believe that most readers would be satisfied with that return over a decade, and it is well ahead of our 8 per cent target.
Changes: This is a Buy and Hold portfolio, so I am not making any changes to our holdings. The bond ETF is a drag on the portfolio at this point, but some of the stock losses have been worse (e.g., Alphabet).
We are holding a lot of cash so with prices in retreat let’s put some of it to work, as follows.
BCE – We’ll buy 10 more shares at $62.18 for a total cost of $621.80. That will give us 195 shares. The retained earnings will drop to $39.17.
BAM.A - We’ll add another five shares at $57.61 for a total of $288.05. That will give us 370 shares. The retained earnings will drop to $74.69.
CNR – We have enough to buy another five shares at $142.16, for an expenditure of $710.80. We now own 115 shares and have retained earnings of $79.56.
ENB – Enbridge is doing well these days, so we’ll buy another five shares at $52.97 for a cost of $264.85. That will bring our position to 200 shares and leave $151.60 in retained earnings.
TD –We’ll purchase another five shares at $84.01, for a cost of $420.05. We now own 180 shares and have retained earnings of $214.75.
WMT – We will buy five shares at $123.62 for a total outlay of $618.10. That leaves $134 in retained earnings.
We have cash and retained earnings of $2,615.55. We will move this money to the Wyth High Interest Savings Account, which currently pays 1.80 per cent. Wyth was recently acquired by Equitable Bank and its deposits are covered by the Canada Deposit Insurance Corp.
Here is the revised portfolio. I will update it again in December.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.