8.3%
RISING RATES HIT HIGH YIELD PORTFOLIO
By Gordon Pape, Editor and Publisher
High-yield portfolios can generate above-average cash flow. But when interest rates rise, the market value of interest-sensitive securities declines.
That’s what has been happening to our High-Yield Portfolio over the past year. The cash flow continues to be strong, but the overall value of our stocks has declined. That will turn around when rates start to fall again, but in the meantime, we have to tough it out.
This portfolio was created for investors who are looking for above-average dividend income and who are willing to accept somewhat more risk. The 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, Canadian dividends are eligible for the dividend tax credit.
The initial portfolio value was $24,947.30, and I set a target average annual total rate of return of 7% to 8%, with an annual yield of around 5%.
Here is a review of the securities we own and how they have performed in the time since our last review in September. Results are to March 24.
Enbridge Inc. (TSX, NYSE: ENB). We haven’t seen much movement here as the stock has been held back by rising interest rates and malaise in the broad market. The shares are down $1.21 from the time of the last review in September. But that was offset by two dividend payments for a total of $1.7475 per share, so we did slightly better than breakeven. The dividend was increased 3.2% effective with the February payment.
Pembina Pipeline Corp. (TSX, NYSE: PPL). The Enbridge comments apply here as well. Pembina is down $0.58 from the time of the last review. However, we received dividends of $1.315 in the period, so we ended up slightly ahead. Note that Pembina moved to a quarterly payment this year. It had previously been monthly. At the current price, the dividend yield is 6.2%.
Sun Life Financial Inc. (TSX, NYSE: SLF). After a weak performance in the first nine months of 2022, SLF rebounded and added $6.16 in the latest six-month period. We received two dividend payments for a total of $1.44 per share. The current yield is 4.7%.
Capital Power Corp. (TSX: CPX). After posting a nice gain in the first part of 2022 when the broad market was in a downward spiral, Capital Power gave most of it back, losing $9.23 a share in the latest period. We received two dividends totaling $1.16 a share. The retreat in the share price pushed the dividend yield to 5.6% at the current price.
Canadian Imperial Bank of Commerce (TSX, NYSE: CM). It’s a bad time for bank stocks. The collapse of Silicon Valley Bank and the forced takeover of Credit Suisse have shaken the whole sector and driven down share prices. At the start of the month, CM was trading at $62.44. Now it’s down to $56.66 and yielding 6%. That’s a lot for a Big Six bank. If the storm clouds lift over the banking sector, except to see a nice gain here at the next review.
Brookfield Energy Partners (TSX: BEP.UN, NYSE: BEP). This Bermuda-based limited partnership invests in an international portfolio of clean energy properties, mainly hydro. It’s been a tough run for green energy and the units are down $6.96 from the last review. The quarterly distribution is US$0.3375.
BCE Inc. (TSX, NYSE: BCE). The stock was down $0.66 in the latest six-month period. The dividend is $0.9675 per quarter ($3.87 a year). The stock yields 6.4% at the current price.
Firm Capital (TSX: FC). Mortgage investment corporations normally see their share prices decline when rates rise, and that continues to be the case here. We’re showing a loss to date, but the monthly cash flow is steady, with a yield of 8.5%. When interest rates turn back down, this stock will rise quickly.
Algonquin Power & Utilities Corp. (TSX, NYSE: AQN). Bad news here. The stock was hammered after weak earnings report and guidance. Earlier this month, the company slashed its quarterly dividend to US$0.1085 a share. The stock is down almost $6 since our last review and will take a long time to recover.
North West Company Inc. (TSX: NWC). This company has a long history, with a prime focus on general stores in Northern Canada and Alaska. The shares are up $4.10 since the last review. We received two dividends of $0.38 each. The yield is 4.6%.
Automotive Properties REIT (TSX: APR.UN). Automotive Properties is the only listed REIT focusing on owning and acquiring automotive dealerships in Canada. It was added to the portfolio in September at $13.20. The price has pulled back by $0.96 since. Monthly distributions are $0.067 per unit, to yield 6.6%.
We earned $40.81 from the cash we deposited in an account with Saven Financial that paid 3.3% at the time.
The table below shows what the portfolio looked like as of the close of trading on March 24. 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 it was added to the portfolio. Sales commissions and exchange rates are not considered.
Income Investor High Yield Portfolio (a/o March 24/23)
| Security | Weight % |
Total Shares |
Average Price |
Book Value |
Current Price |
Market Value |
Retained Income |
Gain/
Loss % |
| ENB | 8.1 | 90 | $43.98 | $3,957.80 | $50.43 | $4,538.70 | $323.30 | +22.8 |
| PPL | 11.2 | 150 | $33.31 | $4,996.65 | $41.92 | $6,288.00 | $197.25 | +29.8 |
| SLF | 16.4 | 150 | $31.54 | $4,730.75 | $61.43 | $9,214.50 | $423.00 | +103.7 |
| CPX | 8.8 | 120 | $32.12 | $3,854.40 | $41.07 | $4,928.40 | $270.60 | +34.9 |
| CM | 12.1 | 120 | $56.85 | $6,822.00 | $56.66 | $6,799.20 | $452.00 | +6.3 |
| BEP.UN | 7.1 | 100 | $24.13 | $2,413.00 | $39.96 | $3,996.00 | $304.49 | +78.2 |
| BCE | 7.6 | 70 | $56.75 | $3,972.40 | $60.79 | $4,255.30 | $505.93 | +19.9 |
| FC | 8.4 | 430 | $14.88 | $6,400.40 | $11.05 | $4,751.50 | $214.74 | -22.4 |
| AQN | 3.9 | 200 | $19.02 | $3,803.75 | $11,00 | $2,200.00 | $208.01 | -36.7 |
| NWC | 9.0 | 140 | $26.38 | $3,692.50 | $36.24 | $5,073.60 | $362.30 | +47.2 |
| APR.UN | 6.2 | 285 | $13.20 | $3,762.00 | $12.24 | $3,488.40 | $114.57 | -4.2 |
| Cash | 1.2 | $706.84 | $747.65 | |||||
| Total | 100.0 | $49,112.49 | $56,281.25 | $3,376.19 | +21.5 | |||
| Inception | $24,947.30 | +139.1 |
Comments: The portfolio is down about 2% since the last review. Given the steep increase in interest rates during the period, that’s not a bad result.
Despite the recent losses, we are showing a total return of 139.1% in the 11 years since inception. That translates into an average annual growth rate of 8.25%, which is above our target range.
In terms of cash flow, the portfolio earned $1,650.64 in the latest. six months, for a yield of 2.71% in that time. Over a full year, that would work out to 5.2%. Our cash flow target is 5%, so we’re on track.
Changes: The sharp drop in the value of Algonquin Power & Utilities, followed by a cut in the dividend, tells us to drop it from this portfolio. That will give us $2,408.01 to reinvest.
We will buy 170 shares of Freehold Royalties Ltd. (TSX: FRU) at $14.10, for a total cost of $2,397. We’ll add the balance of $11.01 to our cash account.
Calgary-based Freehold is a dividend-paying oil-and-gas royalty company with assets predominately in Western Canada, although it is expanding in the US. It’s paying $0.09 per month ($1.08 per year) to yield 7.7% at the current price. The company has a history of managing its dividend to reflect current developments in the fossil fuels industry. Right now, we’re getting a high return, but we’ll keep a close eye on the stock if oil prices falter.
We’ll use some of our retained earnings as follows:
FC – We’ll add another 20 shares for a cost of $221. We now have 450 shares. Retained earnings drop to zero, and we’ll take $6.26 from cash to make up the difference.
NWC – We will purchase 10 shares at $36.24, for a cost of $362.40. This will bring our total holding to 150 shares and reduce retained earnings to zero. We’ll take $0.10 from cash to make up the difference.
APR.UN – We’ll add another five units at $12.24, for a cost of $61.20. That brings our position to 290 units and reduces retained earnings to $53.37.
Our retained earnings plus cash now totals $3,282.24. We’ll move the money to a Scotiabank Momentum Plus savings account, which is paying a 5% promotional rate.
Here is the revised portfolio. I will review it again in September.
Income Investor High Yield Portfolio (revised March 24/23)
| Security | Weight % |
Total Shares |
Average Price |
Book Value |
Current Price |
Market Value |
Retained Income |
| ENB | 8.0 | 90 | $43.98 | $3,957.80 | $50.43 | $4,538.70 | $323.30 |
| PPL | 11.0 | 150 | $33.31 | $4,996.65 | $41.92 | $6,288.00 | $197.25 |
| SLF | 16.1 | 150 | $31.54 | $4,730.75 | $61.43 | $9,214.50 | $423.00 |
| CPX | 8.6 | 120 | $32.12 | $3,854.40 | $41.07 | $4,928.40 | $270.60 |
| CM | 11.9 | 120 | $56.85 | $6,822.00 | $56.66 | $6,799.20 | $452.00 |
| BEP.UN | 7.0 | 100 | $24.13 | $2,413.00 | $39.96 | $3,996.00 | $304.49 |
| BCE | 7.5 | 70 | $56.75 | $3,972.40 | $60.79 | $4,255.30 | $505.93 |
| FC | 8.7 | 450 | $14.71 | $6,621.40 | $11.05 | $4,972.50 | $0 |
| FRU | 4.2 | 170 | $14.10 | $2,397.00 | $14.10 | $2,397.00 | $0 |
| NWC | 9.5 | 150 | $27.03 | $4,054.90 | $36.24 | $5,436.00 | $0 |
| APR.UN | 6.2 | 290 | $13.18 | $3,823.20 | $12.24 | $3,549.60 | $53.37 |
| Cash | 1.3 | $752.30 | $752.30 | ||||
| Total | 100.0 | $48,395.80 | $57,127.50 | $2,529.94 | |||
| Inception | $24,947.30 |
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