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In March 2012, we launched a High-Yield Portfolio for readers of my Income Investor newsletter looking for above-average cash flow and who could handle a higher level of risk.

This 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, a high percentage of the payments will receive favourable tax treatment as eligible dividends or return of capital.

The initial value was $24,947.30, and I set a target average annual 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 eight months since our last review in September. Results are to May 8.

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The Keg Royalties Income Fund (KEG.UN-T). All restaurants are victims of the coronavirus lockdown and are taking drastic action to survive. The Keg cut its distribution by almost two-thirds, to 3.5 cents per month, and we could see more cuts if the situation drags on. The share price is down by about half since the last review. The units yield 4.9 per cent at the new distribution rate, which would be acceptable if we were confident it could be maintained. We aren’t.

Canoe EIT Income Fund (EIT.UN-T). This closed-end fund invests in a portfolio of high-quality Canadian and U.S. stocks and pays a distribution of 10 cents per month. The stock market sell-off in March hit the portfolio hard. The unit value has recovered since then but is still well down from our purchase price. The fund has maintained its monthly distributions.

Enbridge Inc. (ENB-T). This stock has more or less held its ground since the last review in September. The quarterly dividend was increased by almost 10 per cent in February to 81 cents. The stock yields 7.3 per cent at the current price.

Northview REIT (NVU.UN-T). The REIT sector has taken a hit due to the impact of COVID-19 but this is one of the few that has gained in price, up more than $5 since the last review. The reason: Northview is being taken over at a price of $36.25 per unit, subject to shareholder approval. A vote is scheduled for May 21. In the meantime, regular distributions continue.

Morneau Shepell Inc. (MSI-T). Morneau Shepell has not been hurt by the coronavirus lock-down, in fact the stock is up 66 cents since the last review. However, the yield is down to 2.35 per cent. The company hasn’t raised its payout in several years, preferring to focus on growth.

Pembina Pipeline Corp. (PPL-T). Pembina shares took a big hit when oil prices dropped but the stock has made a recovery and the company has twice reaffirmed that its monthly dividend of 21 cents a share is secure. At the current price, the yield is 7.9 per cent.

Sun Life Financial Inc. (SLF-T). Banks and financial stocks were hit hard by the sudden and dramatic fall in interest rates. Sun Life stock is down $7.81 since the last review, although it still is way ahead of book value. The current yield is 4.5 per cent.

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Capital Power Corp. (CPX-T). The shares of this Alberta-based power company dropped to the $20 range in the March sell-off. They have since rebounded somewhat, although they are down $4.60 from our last review. The stock pays a quarterly dividend of 48 cents per share to yield 7.35 per cent at the current price.

Canadian Imperial Bank of Commerce (CM-T). As mentioned, banks and insurance stocks were hard hit by falling rates. CIBC shares are down more than $20 since the last review. The bank recently raised its quarterly dividend to $1.46 per share, which means the stock us yielding 7 per cent at the current price. That’s very rare for a Big Five bank stock.

Dream Global REIT (DRG.UN-T). This REIT was taken over by Blackstone Group in December. We received $16.79 per share for a nice profit on the deal.

Brookfield Energy Partners (BEP-UN-T). This Bermuda-based limited partnership was added to the portfolio last September. It invests in an international portfolio of clean energy properties, mainly hydro. It has performed well, with a price increase of $20.83 since last fall. However, that has knocked down the yield to 4.4 per cent. Note that the distributions are paid in U.S. dollars.

We earned $51.39 from the cash we deposited in an account with Motive Financial that paid 2.8 per cent at the time.

The table below shows what the portfolio looked like as of the close of trading on May 8. 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 inception, or since it was added to the portfolio. Sales commissions and exchange rates are not considered.

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Income Investor High Yield Portfolio (as of May 8)

SecurityWeight %Total sharesAvg. priceBook valueCurrent priceMarket valueRetained incomeGain/loss %
KEG-UN-T4.4220$15.98$3,515.60$8.50$1,870.00$165.96-42.1
EIT-UN-T6.5310$11.18$3,466.00$8.86$2,746.60$295.00-12.2
ENBP-T7.470$49.21$3,444.70$44.65$3,125.50$493.925.1
NVU-UN-T8.3100$29.19$2,919.00$34.88$3,488.00$190.1226
MSI-T7.9100$13.34$1,334.00$33.17$3,317.00$302.05348.7
PPL-T9120$32.13$3,855.45$31.83$3,819.60$322.887.4
SLF-T14.9130$27.48$3,571.85$48.41$6,293.30$503.1390.3
CPX-T6.2100$31.61$3,161.00$26.11$2,611.00$233.50-10
CM-T9.950$114.07$5,703.50$83.23$4,161.50$626.00-16.1
DRG-UN-T4.4110$14.46$1,590.60$16.79$1,846.90$102.6822.6
BEP-UN-T18.9115$48.33$5,557.95$69.16$7,953.40$121.6145
Cash2.2$890.59$941.98
Total100$39,010.24$42,174.78$3,356.8516.7
Inception$24,947.3082.4

Comments: The portfolio was down a little over 4 per cent in the eight-month period, as COVID-19 lockdowns hit The Keg and interest rate declines plus concern about loan losses took a toll on CIBC shares. Lower interest rates also hurt Sun Life’s stock, while the decline in oil prices weighed on Pembina Pipeline.

On the plus side, we saw a big gain on our recent investment in Brookfield Renewable Partners, as green energy companies as a group are performing well in this environment. Our two REIT entries, Northview and Dream Global, became takeover targets, boosting returns there.

Despite the recent loss, we are showing a total return of 82.4 per cent since inception, which translates into an average annual gain of 7.61 per cent. That’s within our target range.

In terms of cash flow, the portfolio earned $1,545.94 in the period for a yield of 3.26 per cent in eight months. Over a full year, that amounts to 4.89 per cent, which is close to target. Only one security, The Keg, cut its payout during the period.

Changes: It’s time for a shake-up in this portfolio. We’ll start by selling the following positions:

  • The Keg. Restaurants will eventually reopen but public opinion surveys suggest the number of people willing to dine out will not return to pre-COVID levels for some time. We will receive $2,035.96 from this sale, including retained income.
  • Canoe Income Fund. The fund will likely continue to pay the 10-cent monthly distribution, but it may be at the cost of a continued decline in net asset value. That’s not a risk we should take. Proceeds: $3,041.60
  • Northview REIT. It’s about to be taken over, which will mean an end to the cash flow that drives this portfolio. Proceeds: $3,678.12.
  • Morneau Shepell. This stock has performed very well for us, but the yield is too low for this type of portfolio. Proceeds: $3,619.05.
  • Dream Global REIT. The takeover forced our hand. Proceeds: $1,949.58.

This gives us a total of $14,324.31 to reinvest. We will buy the following (prices as of the close on May 8):

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BCE Inc. (BCE-T). BCE’s first-quarter revenue took a slight hit from the decline in media advertising due to COVID-19 and the company withdrew its 2020 guidance. However, management said that the company has significant financial flexibility and free cash flow to cover capital expenditures and dividends. The shares pay a quarterly dividend of 83.3 cents ($3.332 annually) to yield 5.9 per cent. We will buy 60 shares at $56.75 for a cost of $3,405.

AT&T Inc. (T-N). This giant U.S. telecom reported first-quarter results that were respectable but below expectations. The company withdrew its guidance for the year but said it expects to provide cash from operations to support investments in growth areas, dividend payments, and debt retirement. The quarterly dividend is 52 US cents a share (US$2.08 a year) for a yield of just under 7 per cent. We’ll buy 120 shares at US$29.79 for a total investment of US$3,574.80.

Algonquin Power & Utilities Corp. (AQN-T). The company announced on May 7 that it is increasing its annual dividend by 10 per cent, to 62.04 US cents per share annually (15.51 US cents per quarter). At the new rate, the stock yields 4.5 per cent at the current price of $19 (Canadian). Note that Algonquin reports in U.S. dollars, and the dividend is in U.S. currency. We will buy 185 shares at a cost of $3,515.

North West Company Inc. (NWC-T). This company has a long history, with a prime focus on general stores in northern Canada and Alaska. It has been deemed an essential service as in some small communities it is the only source of supplies. The shares pay a quarterly dividend of 33 cents ($1.32 annually) to yield 5.1 per cent at a price of $25.97. We will buy 135 shares for a cost of $3,505.95.

That works out to a total investment of $14,000.75. We will add the remaining $323.56 to our cash reserve.

We will also use some of our retained earnings to take advantage of lower prices, as follows:

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  • ENB – We will buy 10 shares at $44.65 for an investment of $446.50. That will bring our share count to 80 and reduce retained income to $47.42.
  • PPL – We will add 10 shares at $31.83 for an investment of $318.30. That will bring our total to 130 shares and reduce retained income to $4.58.
  • SLF – We’ll buy 10 shares for $484.10. We now have 140 shares and retained earnings of $19.03.

After these transactions, our cash balances will total $2,317.68. We keep this amount in Motive Financial, owned by Canadian Western Bank (CWB-T), which is now paying 2.2 per cent on its Savvy Savings Account.

Here is the revised portfolio.

Income Investor High Yield Portfolio (revised May 8) 

SecurityWeight %Total sharesAvg. priceBook valueCurrent priceMarket valueRetained income
ENB-T880$48.64$3,391.20$44.65$3,572.00$47.42
PPL-T9.4130$32.11$4,173.75$31.83$4,137.90$4.58
SLF-T15.2140$27.48$4,055.95$48.41$6,777.40$19.03
CPX-T5.9100$31.61$3,161.00$26.11$2,611.00$233.50
CM-T9.450$114.07$5,703.50$83.23$4,161.50$626.00
BEP-UN-T17.9115$48.33$5,557.95$69.16$7,953.40$121.61
BCE-T7.660$56.75$3,405.00$56.75$3,405.000
T-N8120$29.79$3,574.80$29.79$3,574.800
AQN-T7.9185$19.00$3,515.00$19.00$3,515.000
NWC-T7.9135$25.97$3,505.95$25.97$3,505.950
Cash2.8$1,265.54$1,265.54
Total100$41,309.64$44,479.49$1,052.14
Inception$24,947.30

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