Initial Value $49,945.40
June 15, 2012
Update Value $154,545.38
June 19, 2023
BUY AND HOLD SETBACK
By Gordon Pape, Editor and Publisher
Anyone who uses a buy and hold strategy to invest must have patience and faith. Patience, because a typical buy and hold security will take time to deliver its rewards. Faith because if you don’t believe in the securities you select, you’re likely to panic and sell at the first sign of a recession.
Faith in our Buy and Hold Portfolio was put to the test in the latest six-month period. Our last review was based on prices as of Dec. 1. Subsequently, the TSX experienced two major selloffs, in December and March. The S&P 500 showed a similar pattern, although not as extreme.
The net result is that all our Canadian securities were hit, along with one large US holding. These are all good companies and I expect them to recover, but there’s no denying the pain they’re currently inflicting.
The IWB Buy and Hold Portfolio was launched eleven years ago this month. It invests in high-quality stocks. The intention is to stick with them through both bull and bear markets. 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 performance over the years has proved the point: an average annual compound rate of return of over 10%.
The portfolio consists mainly of Canadian and US blue-chip stocks that offer long-term growth potential. It also has a bond ETF holding. The original weighting was 10% for each stock with the bond ETF starting with a 20% 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% annually.
These are the securities we hold with comments on how they performed since my last review in December. Prices are as of the close of trading on June 15.
iShares Canadian Universe Bond Index ETF (TSX: XBB).
The bond market appeared to be turning around. But when inflation refused to fall as quickly as hoped, the Bank of Canada started to raise rates again. That was bad news for XBB. The units are down $0.67 since the time of our last review in early December. That’s not a lot, but it’s directionally not what we want to see. We received distributions totalling $0.412 per unit.
BCE Inc. (TSX, NYSE: BCE). BCE shares hit a 2023 high of about $65 in April but have been retreating since due to weak performance numbers. The company stunned the media community last week when it announced major cutbacks that included several high-profile TV reporters. The company increased its dividend from $0.92 per share to $0.9875.
Brookfield Asset Management (TSX, NYSE: BAM),
Brookfield Corporation (TSX. NYSE: BN). Pay attention because Brookfield has made another of its unusual financial manoeuvres. We have owned shares of Brookfield Asset Management (BAM) in this portfolio for years. In December, BAM decided to change its name to Brookfield Corporation (trading symbol BN). BN then spun-out shares in its asset management business (BAM), with BN shareholders receiving one share of BAM for every share of BN they owned. So, we now own shares in both companies, with BN being the original and BAM the spin-off. Confusing? You bet! BAM pays a quarterly dividend of US$0.32 a share. BN pays US$0.07.
CN Rail (TSX: CNR, NYSE: CNI). After an impressive performance last fall, CN shares have slipped back again, losing $16.86 in the latest period. Because of timing we received three dividend payments totalling $2.31 a share. The dividend was increased by 7.8% effective with the March payment.
Enbridge (TSX, NYSE: ENB). Enbridge shares were hit by rising interest rates and weaker energy prices. The shares are down $5.73 since the December update. We received two quarterly dividends for a total of $1.775.
Toronto Dominion Bank (TSX, NYSE: TD). The banks are still under pressure as investors are concerned about a possible recession and the turmoil in US regional banks. TD’s planned takeover of Horizons Bank, which would have significantly enlarged its US footprint, has been aborted. The stock has performed poorly since our December review, losing $11.21. We received two dividend payments of $0.96 each for a total of $1.92 per share.
Alphabet (NDQ: GOOGL). Tech stocks were crunched last year as the boost from the pandemic evaporated. But this year is another story. Alphabet shares are up by about 25% since our last review, making this our top performer in the past six months. This is the only stock in the portfolio that does not pay a dividend.
UnitedHealth Group (NYSE: UNH). UNH is the top health insurer in the US and until now has been a steady profit producer. But the shares lost a surprising US$71.07 (13.2%) since our last review. One of the company’s top executives said in a presentation that UNH was expecting to cover the costs of a higher number of elective surgeries that had been postponed by the pandemic. Those remarks prompted some people to sell, and others decided to take profits. This should just be a temporary situation, however. The beauty of the insurance business is that when costs go up, the companies respond by raising premiums. We received three dividends due to timing, for a total of US$5.18 per share.
Walmart (NYSE: WMT). Walmart shares posted a gain of $4.36 during the review period. We received three quarterly dividends for a total of US$1.70 per share.
Cash. We moved our cash and retained earnings of $2,726.17. to CIBC, which was offering a special rate of 4.5% on new eAdvantage Savings Accounts. We received $61.34 in interest.
Here is the status of the portfolio as of June 15. The Canadian and US dollars are shown at par, but obviously the US holdings are doing better thanks to the strength of the greenback. Trading commissions are not factored in, although in a buy and hold portfolio they are not significant in any event.
IWB Buy and Hold Portfolio (a/o June 15/23)
Comments: The new portfolio value (market price plus retained dividends/distributions) is $154,545.38. That compares to $160,065.12 at the time of the last review, for a loss of 3.4%.
All our securities lost ground during the period except Alphabet, which rebounded strongly, and Walmart.
Since inception, we have a total return of 209.4%. That represents an average annual compound growth rate over 11 years of 10.81%. Despite the latest setback, that is well ahead of our 8% target.
Changes: Normally, I don’t make changes to this portfolio. Buy and hold should mean exactly that. But we have an unusual situation this time. The Brookfield spin-off has left us with two Brookfield stocks in the portfolio. Brookfield Corporation (BN) gives us exposure to all sectors of the company: asset management, real estate, renewable power, infrastructure, etc. Brookfield Asset Management (BAM) only targets one segment of this vast conglomerate.
Accordingly, we will retain our position in BN and sell our shares in BAM for $4,174.77 (including the small amount of retained earnings). We will use the money to buy 30 shares of Proctor & Gamble (NYSE: PG) at $148.45. The total cost is $4,453.50. We will take $278.73 from cash to make up the difference.
P&G should need no introduction to readers. Almost everyone has some of its products in their homes. The stock has a long history of gradual increases and is currently close to its all-time high. The shares have been recommended in our Income Investor newsletter.
We will use some of our retained earnings, as follows.
XBB – We will add ten units at a cost of $273.80. We now own 530 units, and our retained income is reduced to $75.47.
BCE – We’ll buy five shares for $300. Our total position is now 200 shares and we have retained earnings of $260.62.
TD –We’ll purchase another five shares at $80.58, for a cost of $402.90. We now own 190 shares and have retained earnings of $28.50.
We have cash and retained earnings of $3,756.28. Manulife Bank is offering a special rate of 5% on new savings accounts, so we’ll move our money there to take advantage of it.
Here is the revised portfolio. I will update it again in December.
IWB Buy and Hold Portfolio (revised June 15/23)