Rate of Return: 9.9%
Anyone who has studied investing closely understands the cyclical nature of the process as it relates to interest rates. Some types of securities thrive when rates move higher (for example, GICs). Others see strong gains when the central banks are easing.
We have just entered a new easing phase. Both the Bank of Canada and the Federal Reserve Board dropped their target rates by a quarter point in mid-September, and many economists think there is much more to come.
That should be welcome news for those readers who have been tracking our High-Yield Portfolio. All the securities it holds are interest-rate sensitive, although that’s obviously not the only factor affecting their share price.
The main objective of this portfolio is to generate above-average cash flow. If we can score some capital gains, so much the better.
Right now, our model High-Yield Portfolio is delivering on both counts. These stocks were badly beaten when the Bank of Canada was raising interest rates, but now we’re seeing a turnaround that should last for several months.
This portfolio was created in March 2012 for investors seeking above-average dividend income who were willing to live with 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%.
Comments: The portfolio has a total value of $89,937.43 and is up 7.9% since the last review four months ago.
We have a total return of 260.5% in the 13-1/2 years since inception. That translates into an average annual growth rate of 9.96%, which is well above our target range.
In terms of cash flow, the portfolio earned $1,430.02 in the four months since the last review. The yield for that period was 1.72%. Our annual cash flow target is 5%, so the portfolio is performing as expected.
Changes: All our securities are performing reasonably well, so we won’t make any changes. However, we will reinvest some of our retained earnings as follows:
PPL – We’ll buy another 10 shares for $551.50. This brings our total to 170 shares and leaves $242.25 in reserve.
SLF – We’ll add 10 shares at a cost of $830.10. That brings our total to 170 shares, with $123.50 remaining.
FC – We’ll buy 40 shares at $12.37 for a cost of $494.80. That brings our total to 540 shares, with $66.82 left in reserve.
We love taking advantage of bank promotions with our cash. Right now, Tangerine Bank is offering an annualized rate of 4.5% for five months on new accounts, so we’ll move the money there. We have $3,576.28 to deposit.
Here is the revised portfolio. I’ll review it again in March.