11.5%
When TFSAs were first launched, there wasn’t enough contribution room to consider using them for income purposes.
But that has changed over time, as annual contribution limits have increased the amount you can accumulate. Anyone who was 18 or older in 2009 has a total lifetime limit of $63,500 this year. That will increase by another $6,000 in 2020.
With the growth in available contribution room, we decided to launch a model Income Portfolio in May 2015. The goal is to generate cash flow in the 5% range for TFSA accounts. This makes it especially useful for older people who want to receive tax-free income. You can withdraw the dividends/distributions earned each year without paying any tax, while leaving the principal intact.
This approach will also work in RRSPs, RRIFs, and non-registered accounts. It just won’t be as tax-effective in those cases.
This is not a low-risk portfolio. It is entirely invested in stocks, which makes it more vulnerable than a balanced portfolio that includes bond holdings. This means that anyone who wishes to emulate this portfolio should be more interested in steady cash flow and not fixated on the bottom-line value from month to month. That will vary up or down, depending on conditions. As long as you are still receiving your 5% cash return, don’t be overly concerned by the share price movements.
At the time I launched this portfolio, the maximum cumulative lifetime contribution for a TFSA was $41,000, so that was the initial starting value.
I selected 10 securities from The Income Investor Recommended List. All are traded on the TSX, so currency exchange is not a factor, except for the distributions from the limited partnerships, which are in U.S. dollars. I gave each security an initial weighting of approximately 10% for diversification and balance.
Here are the components of the portfolio with a brief report on how they have performed since the last update in May. Prices are as of the close of trading on Nov. 22.
BCE Inc. (TSX, NYSE: BNS). BCE shares continued to move higher, aided in part by a decline in interest rates. We received two dividends for a total of $1.585 per share. At the current price, the stock yields a shade under 5%.
Bank of Nova Scotia (TSE, NYSE: BNS). After being stuck in a rut for some time, BNS shares jumped by almost $5 in the latest six-month period. We received a dividend increase, the second this year, with the September payment up 3.4% to $0.90 per share. The yield is 4.8%.
Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This Bermuda-based limited partnership invests in infrastructure projects in North and South America, Europe, and Australia. It has been a huge winner for us, and the price jumped by another $13.17 in the latest period. We received two distributions during the period, for a total of US$1.005. The current yield (based on U.S. dollar distributions) is 3.8%. That’s a drop of one percentage point since the last review, due to the price appreciation.
Brookfield Renewable Partners (TSX: BEP.UN, NYSE: BEP). This partnership focuses on renewable energy, mainly hydro but also some wind projects. Like Brookfield Infrastructure, we saw a huge increase in the price over the latest period, with an upwards move of $17.15. See my updates elsewhere in this issue for more details. We received two distributions totalling US$1.03. The yield dropped to 4.5%, again due to the price increase.
Pembina Pipeline (TSX: PPL, NYSE: PBA). We added this pipeline company to the portfolio in May 2018. It pulled back slightly in the latest period, losing $1.19 per share. That was almost exactly offset by dividends totaling $1.20. The stock yields 5.1% at the current price.
North West Company (TSX: NWC, OTC: NWTUF). This stock dropped $1.96 over the period. We received two quarterly dividends of $0.33 per share ($1.32 per year). The current yield is 4.6%.
Sienna Senior Living Inc. (TSX: SIA, OTC: LWSCF). Sienna’s share price dropped $0.45 during the latest period. However, we received a small dividend increase in mid-year and the total payout over the period exceeded the price drop by a penny. The current yield is 5.1%.
TransAlta Renewables Inc. (TSX: RNW, OTC: TRSWF). The rally in these shares continued, with a gain of $1.27. The monthly payment is $0.07833 per share ($0.93996 per year), so the cash flow is good. The price increase dropped the yield to 6.6%.
Firm Capital MIC (TSX: FC). This mortgage investment corporation saw an unusual price jump of $0.89 a share in the latest period. Falling interest rates were the prime reason. The dividend has been the same for years, at $0.078 per month, to yield 6.5%.
Dream Global REIT (TSX: DRG.UN). Earlier this month, unitholders approved the sale of this REIT to Blackstone Group for $16.79 per unit. That makes for a nice capital gain for us, but we are losing a valuable cash flow producer from our portfolio. Distributions were suspended after the September payment, so we only received $0.2664 for the period.
We received interest of $17.15 during the latest period from our Motive Financial savings account.
Here is how the portfolio looked at the close of trading on Nov. 22.
TFSA Income Portfolio (a/o Nov. 22/19)
| Security | Weight
% |
Total
Shares |
Average
Price |
Book
Value |
Market
Price |
Market
Value |
Income
Retained |
Gain/
Loss % |
| BCE | 8.8 | 90 | $54.59 | $4,913.20 | $63.59 | $5,723.10 | $143.55 | +19.4 |
| BNS | 8.2 | 70 | $66.15 | $4,630.60 | $75.56 | $5,289.20 | $156.80 | +17.6 |
| BIP.UN | 14.0 | 130 | $37.92 | $4,929.78 | $69.67 | $9,057.10 | $130.65 | +86.4 |
| BEP.UN | 11.3 | 120 | $37.92 | $4,548.90 | $60.98 | $7,317.60 | $342.56 | +68.4 |
| PPL | 6.6 | 90 | $43.24 | $3,891.60 | $47.10 | $4,239.00 | $314.10 | +17.0 |
| NWC | 8.2 | 190 | $25.41 | $4,828.25 | $27.74 | $5,270.60 | $248.90 | +14.3 |
| SIA | 9.4 | 330 | $15.39 | $5,079.70 | $18.38 | $6,065.40 | $200.09 | +23.3 |
| RNW | 9.8 | 430 | $12.58 | $5,407.90 | $14.79 | $6,359.70 | $212.01 | +21.5 |
| FC | 9.6 | 430 | $12.67 | $5,446.10 | $14.44 | $6,209.20 | $295.46 | +19.4 |
| DRG.UN | 13.5 | 520 | $10.43 | $5,293.30 | $16.79 | $8,730.80 | $240.24 | +69.5 |
| Cash | 0.6 | $390.50 | $407.65 | |||||
| Total | 100.0 | $46,821.52 | $64,669.35 | $2,284.36 | +43.0 | |||
| Inception | $41,000.00 | +63.3 |
Comments: The portfolio gained 12.8% (market price plus retained earnings) during the period, an unusually high return for an income portfolio. Thank falling interest rates for a lot of that gain; this is a very interest-sensitive portfolio.
The portfolio has posted an overall gain of 63.3% since it was started four and a half years ago. On an annualized basis, that works out to 11.5%, which is an excellent return for a portfolio of this type.
Cash flow during the latest period was $1,466.18, for a six-month yield of 2.47% based on the portfolio value last May. In terms of the original $41,000 investment, the six-month yield was 3.58%, so we are well ahead of our 5% annual cash flow target.
Changes: The takeover of Dream Global REIT frees up $8,971.04 that needs to be reinvested. We will move this money into Northview Apartment REIT (TSX: NVU.UN), which has been on our Recommended List since 2004. Distributions are $0.1358 per month ($1.63 annually) to yield 5.4% at the current price of $30.12.
We will buy 290 units for a total cost of $8,734.80. That leaves $236.24, which will be added to our cash account.
We’ll also add to the following positions.
SIA – We will buy 10 shares for $183.80, bringing our total to 340. Retained income will drop to $16.29.
RNW – We will add 10 shares for $147.90, leaving cash of $64.11. We now own 440 shares.
FC – We have enough retained income to purchase 20 shares at a cost of $288.80 for a new total of 450. Our cash balance will be reduced to $6.66.
Readers are reminded not to do small trades unless you have a fee-based account. Use a dividend reinvestment plan when available.
Also, keep in mind that our tracking assumes reinvested dividends/ distributions. If you withdraw income annually, the results will be different.
We will move our cash of $2,067.51 to Laurentian Bank’s Digital High Interest Savings Account, which is currently paying 3.3% (https://www.lbcdigital.ca/en/saving/high-interest-savings-account). This account is covered by CDIC.
Here is the revised portfolio. I will look at it again next May.
TFSA Income Portfolio (revised Nov. 22/19)
| Security | Weight
% |
Total
Shares |
Average
Price |
Book
Value |
Market
Price |
Market
Value |
Income
Retained |
| BCE | 8.7 | 90 | $54.59 | $4,913.20 | $63.59 | $5,723.10 | $143.55 |
| BNS | 8.1 | 70 | $66.15 | $4,630.60 | $75.56 | $5,289.20 | $156.80 |
| BIP.UN | 13.8 | 130 | $37.92 | $4,929.78 | $69.67 | $9,057.10 | $130.65 |
| BEP.UN | 11.2 | 120 | $37.92 | $4,548.90 | $60.98 | $7,317.60 | $342.56 |
| PPL | 6.5 | 90 | $43.24 | $3,891.60 | $47.10 | $4,239.00 | $314.10 |
| NWC | 8.0 | 190 | $25.41 | $4,828.25 | $27.74 | $5,270.60 | $248.90 |
| SIA | 9.5 | 340 | $15.48 | $5,263.50 | $18.38 | $6,249.20 | $16.29 |
| RNW | 9.9 | 440 | $12.63 | $5,555.80 | $14.79 | $6,507.60 | $64.11 |
| FC | 9.9 | 450 | $12.74 | $5,734.90 | $14.44 | $6,498.00 | $6.66 |
| NVU.UN | 13.3 | 290 | $30.12 | $8,734.80 | $30.12 | $8,734.80 | $0 |
| Cash | 1.0 | $643.89 | $643.89 | ||||
| Total | 100.0 | $53,674.33 | $65,530.09 | $1,423.62 | |||
| Inception | $41,000.00 |
Previous updates:
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