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First the bad news. My Income Investor High-Yield Portfolio was down 8.8 per cent in the period from March 11 to Sept. 23 (a little over six months).

The good news is that return was much better than the overall market. The S&P/TSX Composite Index was down 13.9 per cent during the same period, proving once again that dividend stocks are more resistant to market slumps.

This portfolio was created in March 2012 for investors who want above-average dividend income and are willing to accept somewhat more risk. The portfolio invests entirely in stocks, so it is best suited for non-registered accounts where any capital losses can be deducted from taxable capital gains. Also, Canadian dividends are eligible for the dividend tax credit, which is not available in registered plans.

The initial portfolio value was $24,947.30, and I set a target average annual total rate of return of 7 per cent to 8 per cent, with an annual yield of around 5 per cent.

Here is a review of the securities we own and how they have performed in the time since our last review. Results are to Sept. 23.

Enbridge Inc. (ENB-T). Pipeline stocks were doing well until the pullback in oil prices prompted some investors to take profits. The shares are down $5.02 from the time of the last review in mid-March. We received two dividends for a total of $1.72 per share.

Pembina Pipeline Corp. (PPL-T). The Enbridge comments apply here as well. Pembina is down $4.32 from the time of the last review. However, we received a small bump of $0.075 in the monthly dividend in September, to 21.75 cents a share ($2.61 a year). At the current price, the dividend yield is 6.1 per cent.

Sun Life Financial Inc. (SLF-T). Financial stocks have been hit hard in the market selloff. This is unusual because these stocks tend to do well when rates are rising. However, right now recession fears trump all else. The stock is down $12.21 since the last review. We received two dividend payments for a total of $1.38 per share. The current yield is 5 per cent, which is very attractive for a sound insurance stock.

Capital Power Corp. (CPX-T). Here’s a stock that bucked the trend. While the broad market was in a downward spiral, Capital Power gained almost $10 a share in the latest period. The company announced that the quarterly dividend will be increased 5.9 per cent, to 58 cents per share ($2.32 per year) effective with the Oct. 31 payment. At that rate, the stock will yield 4.6 per cent at the current price.

Canadian Imperial Bank of Commerce (CM-T). As with Sun Life, we’re seeing a downtrend in financial stocks, of which the banks are the leaders. This is creating great bargains for astute investors. CIBC split its shares two for one in May, so we now own 110. The stock yields 5.5 per cent, very high for a bank.

Brookfield Energy Partners (BEP.UN-T). This Bermuda-based limited partnership invests in an international portfolio of clean energy properties, mainly hydro. The units were trading near $52 in early August but have since retreated. The quarterly distribution is 32 US cents.

BCE Inc. (BCE-T). The stock was down $8.90 in the latest six-month period. The dividend is 92 cents per quarter ($3.68 a year). The stock yields 6 per cent at the current price.

Firm Capital Mortgage Investment Corp. (FC-T). Mortgage investment corporations normally see their share prices decline when rates rise, and that’s the case here. We’re showing a loss to date, but the monthly cash flow is steady, with a yield of 7.9 per cent.

Algonquin Power & Utilities Corp. (AQN-T). Green energy stocks staged a brief rally earlier this year but then got dragged down when the whole market slumped. The shares are down $2.26 since our last review, despite a small dividend increase. As a result, the yield is now up to 5.5 per cent.

North West Company Inc. (NWC-T). This company has a long history, with a prime focus on general stores in Northern Canada and Alaska. The shares are down $5.17 since the last review. We received two dividends of 37 cents each. The yield is 4.6 per cent.

We earned $13.93 from the cash we deposited in an account with EQ Bank that paid 1.25 per cent at the time.

The table below shows what the portfolio looked like as of the close of trading on Sept. 23. The weighting is the percentage of the market value of the security in relation to the total market value of the portfolio. The gain/loss shows the performance of the security since it was added to the portfolio. Sales commissions and exchange rates are not considered.

Income Investor High-Yield Portfolio (as of Sept. 23)

Weight %Total sharesAvg. priceBook valueCurrent priceMarket valueRetained incomeGain/loss %
ENB-T890$43.98 $3,957.80 $51.64 $4,647.60 $166.02 21.6
PPL-T10.3140$32.65 $4,571.65 $42.50 $5,950.00 $424.63 39.4
SLF-T14.3150$31.54 $4,730.75 $55.27 $8,290.50 $207.00 79.6
CPX-T10.4120$32.12 $3,854.40 $50.30 $6,036.00 $131.40 60
CM-T11.6110$56.48 $6,213.30 $60.87 $6,695.70 $859.10 21.6
BEP-UN-T14.6180$24.13 $4,343.87 $46.92 $8,445.60 $238.74 100
BCE-T7.470$56.75 $3,972.40 $61.45 $4,301.50 $373.80 17.7
FC-T8.4410$15.04 $6,164.40 $11.80 $4,838.00 $243.48 -17.6
AQN-T5.9200$19.02 $3,803.75 $16.97 $3,394.00 $135.61 -7.2
NWC-T7.8140$26.38 $3,692.50 $32.14 $4,499.60 $255.90 32.2
Cash1.3$701.68 $715,61
Total100$43,373.03 $57,814.11 $3,035.68 40.3
Inception$24,947.30 143.9

Comments

The reason this portfolio is outperforming the TSX this year is simple: high dividends. They put a floor under the market price of these stocks. Unless there is a serious threat of a dividend cut, which we have not seen with this portfolio, investors will tend to hold on to high-yielding securities.

Despite the recent losses, we are showing a total return of 143.9 per cent in the ten and a half years since inception. That translates into an average annual growth rate of 8.86 per cent, which is above our target range.

In terms of cash flow, the portfolio earned $1,522.71 in the latest. six months, for a yield of 2.28 per cent in that time. Over a full year, that would work out to almost 4.6 per cent. Our target is 5 per cent, so we’re close.

Changes

The largest single holding in the portfolio is Brookfield Renewable Properties. It’s a first-rate operation, but the yield of 3.7 per cent is on the low side for a portfolio of this type. Accordingly, we will sell 80 units at $46.92 for a total of $3,753.60.

We will reinvest this money in 285 units of Automotive Properties REIT (APR.UN-T). It’s paying 6.7 cents per month (80.4 cents per year) to yield 6.1 per cent at the current price. The units are trading at $13.20 so our cost is $3,762. We’ll take the extra $8.40 from cash.

We’ll use some of our retained earnings as follows:

PPL – We’ll buy 10 shares for a cost of $425. That will give us 150 shares and reduce retained income to zero. We’ll take 37 cents from cash to make up the difference.

CM – We will buy another 10 shares for $608.70. That will give us 120 shares and reduce retained earnings to $250.40.

FC – We’ll add another 20 shares for a cost of $236. We now have 430 shares and retained earnings of $7.48.

Our retained earnings plus cash now totals $2,473.19. We’ll move the money to a Saven Financial high interest savings account, which is paying 3.3 per cent.

Here is the revised portfolio. I will review it again in March.

Income Investor High-Yield Portfolio (revised Sept. 23)

Weight %Total sharesAvg. pieceBook valueCurrent priceMarket valueRetained income
ENB-T7.990$43.98 $3,957.80 $51.64 $4,647.60 $166.02
PPL-T10.8150$33.31 $4,996.65 $42.50 $6,375.00 $0
SLF-T14150$31.54 $4,730.75 $55.27 $8,290.50 $207.00
CPX-T10.2120$32.12 $3,854.40 $50.30 $6,036.00 $131.40
CM-T12.4120$56.85 $6,822.00 $60.87 $7,304.40 $250.40
BEP-UN-T7.9100$24.13 $2,413.00 $46.92 $4,692.00 $238.74
BCE-T7.370$56.75 $3,972.40 $61.45 $4,301.50 $373.80
FC-T8.6430$14.88 $6,400.40 $11.80 $5,074.00 $7.48
AQN-T5.7200$19.02 $3,803.75 $16.97 $3,394.00 $135.61
NWC-T7.6140$26.38 $3,692.50 $32.14 $4,499.60 $255.90
APR-UN-T6.4285$13.20 $3,762.00 $13.20 $3,762.00 $0
Cash1.2$706.84 $706.84
Total100$49,112.49 $59,083.44 $1,766.35
Inception$24,947.30

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