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I created this model Balanced Portfolio for my Income Investor newsletter in September 2011. The goal is to combine above-average cash flow with reasonable risk.

The initial valuation was $25,027.75, and the target was to achieve a return that at least matched the best available five-year GIC rate plus two percentage points.

That means the target varies with the rise and fall of interest rates. Right now, the best five-year rate I can find is 3.5 per cent, so we are looking for an annual return on this portfolio in excess of 5.5 per cent.

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Here’s a summary of how the securities we currently hold performed over the six months since I last reviewed this portfolio at the end of March. Prices are as of the close of trading on Sept. 21.

iShares Canadian Short Term Bond Index ETF (XSB-T). Short-term bonds (maturities of five years or less) continued to feel the pinch of higher interest rates. The unit price was down 28 cents in the past six months, but we received distributions of 32.4 cents per unit, so we ended up with a small net gain for the period.

iShares Canadian Universe Bond ETF (XBB-T). After a surprise gain in the last period, this bond fund slumped again, losing 56 cents per unit. Distributions totalled 44.3 cents per unit, so we ended with a small loss.

iShares International Treasury Bond ETF (IGOV-Q). This ETF invests in government bonds from around the world, except the U.S. More than 75 per cent of the holdings are rated A or higher, so the credit quality is very good. We added this fund in September to diversify our bond holdings and to try to boost returns. It did well initially, but rising interest rates hit this fund hard in the latest six months and it dropped $2.88 per unit. There were no distributions to offset this.

Dream Global REIT (DRG.UN-T). We added this real estate investment trust in March to diversify the portfolio and try to boost returns. It invests in commercial real estate properties located in Europe. It has done well for us so far, gaining $1.62 per unit over the past six months. As well, we received monthly distributions of 6.66 cents. The REIT yields 5.1 per cent.

Inter Pipeline (IPL-T). We saw a rally in the shares of this pipeline company, with a gain of 78 cents per share. We received six monthly dividends of 14 cents, for a total of 84 cents per share. The dividend yield is an attractive 7.3 per cent.

Brookfield Renewable Energy Limited Partnership (BEP-UN-T). This renewable energy limited partnership has been a good performer for us, but it lost ground in the latest six months, dropping $1.19. We received two distributions, totalling 98 US cents per unit. The units yield 6.3 per cent.

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Brookfield Infrastructure Limited Partnership (BIP.UN-T). This is another Brookfield partnership, but in this case the assets are invested in infrastructure. After a long winning streak, the price slumped $3.67 in the latest period. This is still the best performer in the portfolio, but the pullback hurt our return for the latest period. We received two distributions of 47 US cents each. The yield is now 4.8 per cent.

BCE Inc. (TSX, NYSE: BCE). BCE shares keep drifting down dropping another $3.01 in the latest period. We received two dividends of 75.5 cents each (total $1.51). The yield on this stock is now up to 5.8 per cent.

Cash. We invested $1,582.65 in a high interest savings account with EQ Bank that paid 2.3 per cent. We earned interest of $18.20 for the period.

Here’s how the portfolio stands now. Commissions have not been factored in. For simplicity, Canadian and U.S. dollars are treated as being at par for purposes of the calculations, although obviously, the distributions received from the two Brookfield partnerships are worth more in Canadian dollar terms.

Income Investor Balanced Portfolio (as of Sept. 21)

Security Weight % Total shares Avg. cost Book value Market price Market value Cash retained Gain/loss %
XSB-T 18 250 $28.45 $7,112.50 $27.03 $6,757.50 $203.66 -2.1
XBB-T 12.1 150 $31.94 $4,791.20 $30.13 $4,519.50 $66.45 -4.3
IGOV-Q 7.8 60 $49.74 $2,984.40 $48.73 $2,923.80 $1.26 -2
DRG.UN-T 11.1 270 $13.75 $3,712.50 $15.37 $4,149.90 $89.10 14.2
IPL-T 8.6 140 $19.29 $2,700.05 $23.14 $3,239.60 $196.05 27.2
BEP.UN-T 13.5 130 $28.55 $3,711.50 $38.87 $5,053.10 $195.51 41.4
BIP.UN-T 17.3 130 $20.02 $2,602.60 $49.86 $6,481.80 $552.06 170.3
BCE-T 10.5 75 $44.20 $3,315.20 $52.43 $3,932.25 $578.79 36.1
Cash 1.1 $416.77 $434.97
Total 100 $31,346.72 $37,492.42 $1,882.88 19.2
Inception $25,027.75 57.3

Comments: The bond section of this portfolio continues to erode in the face of rising rates. On the equity side, we saw gains from Inter Pipeline and Dream Global REIT, but the losses in BCE and the two Brookfield partnerships offset that. For the six-month period, the net result was a small gain of 0.2 per cent, thanks primarily to the strong dividends/distributions we received.

The cumulative gain since inception is 57.3 per cent. That works out to an annual compound growth rate of 6.69 per cent. That’s better than our target, but this portfolio is not making much headway and more changes are needed.

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Changes: We’re going to sell our position in the iShares International Treasury Bond ETF. It has not performed to our expectations and does not provide any cash flow, so we’ll move on. This frees up US$2,925.06 to reinvest.

We will also sell 100 units of XSB for $2,703. That will leave us with 150 units.

We are going to reinvest that money in the iShares Convertible Bond ETF, which trades on the BATS Exchange under the symbol ICVT. It invests in a portfolio of convertible bonds, mainly issued by U.S. companies such as Microchip Technology, Twitter, Intel, and Advanced Micro Devices. Technology companies issue almost half the bonds in the portfolio.

The performance has been excellent, with a year-to-date gain of 9.4 per cent and a three-year average annual compound rate of return (to Aug. 31) of 8.95 per cent. The fund pays monthly distributions, which are currently about 7 US cents per unit. The expense ratio is 0.2 per cent.

Convertible bonds offer an opportunity to earn interest while also potentially benefiting from increases in stock prices. The main negative is that the risk potential is higher in a fund of this type. Only about 13 per cent of the portfolio is in investment-grade bonds (rated BBB or higher). About 62 per cent of the holdings are unrated. The bottom line is we are assuming more risk in the expectation of potentially higher returns.

The units closed on Sept. 21 at US$59.39. We will buy 95 units for a cost of US$5,642.05. That will use the money from our other bond fund sales and we’ll take $13.99 from cash to make up the difference.

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We are also going to sell our position in BCE, which continues to trend down. Including retained dividends, this will give us $4,511.04 to invest. We will use that money to buy 40 shares in Bank of Montreal (BMO-T). The stock closed on Sept. 21 at $108.26, so the total cost of this purchase is $4,330.40. The balance of $180.64 will be added to the cash account.

Finally, we will use retained distributions to buy another 10 units of Brookfield Infrastructure Limited Partnership while the price is down. This will cost $498.60. We now have 140 units and our retained distributions have been reduced to $53.46.

The total cash balance of $1,405.85 will be left on deposit with EQ Bank at 2.3 per cent.

Income Investor Balanced Portfolio (revised Sept. 21)

Security Weight % Total shares Avg. cost Book value Market price Market value Cash retained
XSB-T 10.5 150 $28.45 $4,267.50 $27.03 $4,054.50 $203.66
XBB-T 11.7 150 $31.94 $4,791.20 $30.13 $4,519.50 $66.45
ICVT-Q 14.6 95 $59.39 $5,642.05 $59.39 $5,642.05 0
DRG.UN-T 10.8 270 $13.75 $3,712.50 $15.37 $4,149.90 $89.10
IPL-T 8.4 140 $19.29 $2,700.05 $23.14 $3,239.60 $196.05
BEP.UN-T 13.1 130 $28.55 $3,711.50 $38.87 $5,053.10 $195.51
BIP.UN-T 18.1 140 $22.15 $3,101.20 $49.86 $6,980.40 $53.46
BMO-T 11.2 40 $108.26 $4,330.40 $108.26 $4,330.40 0
Cash 1.6 $601.62 $601.62
Total 100 $32,858.02 $38,571.07 $804.23
Inception $25,027.75

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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