Rate of Return: 11.2%
Investors seeking above-average cash flow need to consider two things.
First, the quality of the security. There are many high-yielding choices available but, in general, the risk is proportionate to the potential gains. If a stock is yielding 9%, there is something worrying investors. Find out what it is and decide if you are willing to live with it.
Second, dividend history. Do some research. Does the company have a history of slashing the dividend in hard times? Does it raise the dividend on a regular basis? Companies like Fortis and Canadian Utilities have increased their payout annually for more than 50 years.
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.
Right now, we’re in a stand-pat phase. The Iran war has sparked fears of rising inflation, which normally would prompt central banks to lower rates. But concerns about inflation are pulling in the opposite direction. If rates start to climb, keep a close watch on this portfolio and consider taking some profits.
The main objective of this portfolio is to generate above-average cash flow. If we can score some capital gains, so much the better.
In the latest period, 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 we saw a strong turnaround when central banks lowered rates after the pandemic. I do not expect that to continue.
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 $107,752.40 and is up 19.8% since the last review in late September.
We have a total return of 331.9% in the 14+ years since inception. That translates into an average annual growth rate of just over 11%, which is well above our target range.
In terms of cash flow, the portfolio earned $2,734.37 in the seven months since the last review. The yield for the period was 3%. Our annual cash flow target is 5%, so the portfolio is performing as expected.
Changes: The dividend cut reduces the yield of Northland Power to 3.1%, which is too low for this portfolio. Therefore, we will sell our position for a total of $10,539.30, including retained earnings.
We will use the money to buy 370 shares of Gibson Energy Inc. (TSX: GEI) at a cost of $10,459.90. We have a plus balance of $79.40, which we will add to cash.
Gibson is a Calgary-based company that’s involved in the gathering, storing, optimizing, and processing of liquids and refined products in Canada and the United States. The company operates a network of infrastructure assets that include terminals, rail loading and unloading facilities, gathering pipelines, diluent recovery unit, and crude oil processing facility. It also purchases, sells, stores, and optimizes hydrocarbon products, including crude oil, natural gas liquids, road asphalt, roofing flux, frac oils, light and heavy straight run distillate. The stock has been on our recommended list since October 2021.
The shares are trading at $28.27 and pay a quarterly dividend of $0.45 ($1.80 per year) to yield 6.4%.
We will also use retained earnings to buy another 10 shares of PEY at $24.31, for a total cost of $243.10. We now own 185 shares with retained earnings of $180.40.
We have $5,745.75 in cash and retained earnings. Neo Financial is offering 3% on new savings accounts, so we’ll move the money there.
Here is a review of the securities we own and how they have performed in the time since our last review in late September. Results are to April 24.