9.7%
We launched our model Income Portfolio in May 2015, so we now have four years of history with which to work. 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.
I must stress again that 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 November. Prices are as of the close of trading on May 24.
BCE Inc. (TSX, NYSE: BNS). We saw a nice rally in BCE shares in the latest period, with the price moving up by $4.67. The company also implemented a dividend increase of 5%, to $0.7925 per quarter ($3.17 per year). We received two dividends for a total of $1.5475. At the current price, the stock yields 5.2%.
Bank of Nova Scotia (TSE, NYSE: BNS). Canadian bank stocks are mired down these days. This one is up only $0.42 since our last review (0.06%). The good news is that we received another dividend increase, the second in the past 12 months, with the April payment up 2.4%, to $0.87 per share. The combination of the two increases and the share price stagnation has pushed up the yield to 4.9%.
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. The price continued its upward climb in the latest period, gaining $3.47 per unit. We also benefitted from a distribution increase in February, a 6.9% increase to US$0.5025 per quarter (US$2.01 per year). We received two distributions during the period for a total of US$0.9725. The current yield (based on U.S. dollar distributions) is 4.8%.
Brookfield Renewable Partners (TSX: BEP.UN, NYSE: BEP). This partnership focuses on renewable energy, mainly hydro but also some wind projects. The units rallied strongly in the latest period after a weak 2018. They are up are $6.18 from the time of our last review. Fortunately, we bought 10 more units at that time, so we have made a handsome profit here. As with the infrastructure partnership, we received a distribution increase, this one of 5.1%, to US$0.515 per quarter (US$2.06 per year). We received two distributions totalling US$1.005. The units yield 6.3% at the current price.
Pembina Pipeline (TSX: PPL, NYSE: PBA). We added this pipeline company to the portfolio a year ago, replacing Inter Pipeline, which had been a disappointment. The stock held its own over the summer of 2018 with the shares rising a modest $0.51. But it moved sharply higher in the latest period, gaining $4.54. We also received a dividend increase of one penny per month, to $0.20 per share ($2.40 a year). We received total distributions of $1.15 in the latest period. The total return during the six months was an impressive 13%. The stock yields almost 5% at the current price.
North West Company (TSX: NWC, OTC: NWTUF). This stock was almost flat over the latest six months, losing two cents a share. The quarterly dividend was increased by a penny in March, to $0.33 per share ($1.32 per year). We received two payments totalling $0.65. The current yield is 4.4%.
Sienna Senior Living Inc. (TSX: SIA, OTC: LWSCF). Sienna’s share price rallied during the latest period, gaining $2.07. We received six monthly dividends of $0.0765 per share for a total of $0.459. The current yield is 4.9%.
TransAlta Renewables Inc. (TSX: RNW, OTC: TRSWF). We saw a nice rally in these shares, with a gain of $2.39. We added 10 shares at the time of the last review, so we were able to take full advantage of the price rise. 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 7%.
Firm Capital MIC (TSX: FC). This is the Steady Eddy stock in this portfolio. The share price never varies much, and the dividend has been the same for years, at $0.078 per month, to yield 6.9%.
Dream Global REIT (TSX: DRG.UN). This international REIT invests in office, industrial, and mixed-use properties in Europe. It made a modest recovery after a loss in the summer of 2018, gaining $0.38 per unit in the latest period. The units pay $0.0666 per month, or about $0.80 per year. The yield is 5.7% at the current price and 7.6% based on book value.
We received interest of $27.36 during the latest period from our EQ Bank savings account.
Comments: The value of the portfolio (market price plus retained earnings) gained a healthy 10% during the period, as many of our stocks were helped by the turnaround in interest rates.
The portfolio has posted an overall gain of 44.8% since it was started four years ago. On an annualized basis, that works out to 9.69%, which is an excellent return for a portfolio of this type.
Cash flow during the latest period was $1,431.74, for a six-month yield of 2.65% based on the portfolio value last November. In terms of the original $41,000 investment, the six-month yield was 3.49%, so we are well ahead of our 5% annual cash flow target.
Changes: Every stock in the portfolio advanced during the period with the exception of North West Company, which was flat. At the time of my last review, I expressed concern about TransAlta Renewables, but the stock has recovered well since that time.
Given the recent good performance and the continued strong cash flow, I see no need to make any changes to the portfolio at this time. It’s performing exactly as I designed it to do.
However, we will use some of our cash to add to our holdings, as follows:
BCE – We will add 10 shares at a cost of $608.70, to bring our total position to 90. That will use the retained earnings of $596.45, and we will take $12.25 from cash to make up the difference.
BNS – We’ll invest in another 10 shares of Scotiabank, for a cost of $706. That will give us 70 shares and reduce retained earnings to $32.90.
BIP.UN – We will buy 10 units for $565, bringing our total to 130. That will use up all the retained income, and we’ll take $70.30 from cash to fund the difference.
SIA – We will buy 10 more shares at a cost of $188.30. That will bring our position to 330 shares and reduce our retained earnings to $47.13.
RNW – We will buy another 20 shares for $270.40, leaving cash of $9.91. We now own 430 shares.
FC – We will add 10 shares at a cost of $135.50 to a new total of 430. Our cash balance will be reduced to $94.22.
DRG.UN – We will buy another 10 shares for $139.60, bringing our total to 520. We will have $101.71 left in cash.
Readers are reminded not to do small trades unless you have a fee-based account. Use a dividend reinvestment plans 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 $1,224.93 to Motive Financial, which is paying 2.8% in its Savvy Savings Account. Motive is owned by Canadian Western Bank and is covered by federal deposit insurance.
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