Initial Value $49,910.30
February 20, 2013
Update Value $76,635.07
August 27, 2020
By Gordon Pape
The pandemic has disrupted the economy and turned the stock market upside down. What were once low-risk securities have taken a pounding, while more volatile stocks have thrived, especially those in the technology sector.
This RRIF Portfolio was designed to be low risk. And it has been until now. But the last six months have been rough.
This portfolio was created in February 2013 with an initial value of $49,910.30. Its objectives are income generation and capital preservation. The focus is on low-risk assets that provide decent cash flow. We’re still benefiting from the income, but the overall value of the portfolio took a hit.
Here are the current positions with a commentary on how they have fared since the last review in February. Prices are as of the close on Aug. 21.
MAXA Financial five-year GIC. Our original three-year GIC matured in February 2016. We reinvested the $13,418.75 that we received (principal and accrued interest) in a new five-year GIC paying 2.5%, with annual payments, which are compounded. The next payment is due in February 2021, when the GIC will mature.
iShares Core Canadian Universe Bond Index ETF (TSX: XBB). This bond fund seeks to replicate the performance of the broad Canadian bond market, including both government and corporate issues. We added this fund to the portfolio one year ago, and it has done well for a bond ETF, gaining 6.4%.
iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX: CDZ). This fund invests in a portfolio of mainly large-cap companies that have increased their dividends annually for at least five years. It was added to the portfolio in February 2019 and did well initially, generating a total return of 20.1% in the first year. But the pandemic hit this ETF hard, and the unit value fell $5.62 in the latest six months. Distributions totaled $0.574 per unit.
PIMCO Monthly Income ETF (TSX: PMIF). This ETF invests in investment-grade bonds from developed countries around the world as well as some mortgage-backed securities. It pays monthly distributions, which vary significantly from one month to the next. With the sharp drop in interest rates at the onset of the pandemic, we should have expected an increase in the price of this ETF similar to our experience with XBB. Instead, we were down $0.72 in the period, likely due to currency exchange rates. We received distributions of about $0.31 per unit.
CI First Asset Canadian REIT ETF (TSX: RIT). This ETF invests in a diversified REIT portfolio and was added a year ago. It performed very well in its first six months, generating a total return of 7.5%. Then the coronavirus turned everything upside down. Many REITs took big price hits as investors worried that tenants would not be able to pay rents. Other concerns were that many brick-and-mortar stores would be unable to reopen (we’ve already seen evidence of that) and that demand for office space would drop dramatically. The units lost $4.05 over the period, and at one point traded as low as $11.81 before recovering to the current level. Through all this the ETF has maintained its monthly payout of $0.065.
BCE Inc. (TSX, NYSE: BCE). Even blue-chip stocks like BCE were hit by the market plunge in late March. BCE shares fell as low as $46.03 before recovering to the current level. But they are still down $6.66 from the time of the last review. On the plus side, we received a 5% increase in the quarterly dividend in March, to $0.833 per share.
Pembina Pipeline (TSX, NYSE: PPL). Pembina was hit by a double-whammy – the pandemic and the huge drop in oil prices, which affected the entire energy sector. The stock is down $17.66 since the last review and has been able to retain that level only because of repeated assurances from the company that it would maintain its monthly dividend of $0.21 per unit. The stock yields 7.3%.
Brookfield Infrastructure LP (TSX: BIP.UN, NYSE: BIP). This limited partnership invests in infrastructure projects around the world. It recently spun off a Canadian-based corporation, known as Brookfield Infrastructure Corp. (TSX, NYSE: BIPC). We received one share of the new company for every nine partnership units, so we ended up with 25 shares. BIPC is trading at a premium to the parent. We have made the cost base adjustments and added BIPC to the portfolio.
iShares S&P/TSX Capped Utilities Index ETF (TSX: XUT). This ETF invests in a portfolio of utilities stocks traded on the TSX. It was added to the portfolio one year ago and performed very well in its first six months. It was down $1.79 in the latest period, but utilities are one of the most defensive sectors of the stock market, so I don’t see a lot of downside potential from here.
Cash. We kept the cash balance of $1,279.03 in a high-interest savings account with Motive Financial, which was paying 2.8% at the time. However, rates dropped dramatically in March. Now Motive pays only 0.25% for a RRIF savings account of this size. We will estimate the interest received in latest period as $5.
Here’s a look at the RRIF Portfolio as it stood at the close of trading on Aug. 21. The market value of the GIC includes all compounded earnings paid to date. Note that commissions are not deducted, and that U.S. and Canadian currencies are treated at par. Although this is a RRIF portfolio, withdrawals are not factored in, as this would make it impossible to track performance accurately.
Income Investor RRIF Portfolio (a/o Aug. 21/20)
|Security||Weight %||Average Cost||Shares/ Units||Book Value||Current Price||Market Value||Retained Earnings||Gain/Loss %|
Comments: There’s no sugar-coating this. Our RRIF Portfolio was hit by the financial equivalent of a hurricane when the pandemic took hold. The total portfolio value was down 8.4% in the last six months, to $76,635.07. For what was set up to be a low-risk portfolio, that is an unacceptable loss.
Since inception seven and a half years ago, we now have a cumulative total return of 53.5%. That works out to an average annual compounded rate of return of 5.88%. Our target is in the 5% to 6% range, given that much of the portfolio is in GICs and bonds. We are within that range, but I am not happy about the results, so we will make some changes.
Changes: We will start by selling CDZ and RIT, neither of which are appropriate for this era of COVID-19. We will also dispose of PMIF, which has been a disappointment. With retained earnings, that gives us $19,772.68 to reinvest.
We will start by buying 250 shares of Royal Bank of Canada Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BO (TSX: RY.PR.S). This preferred share was introduced by contributing editor Paul Bamford in the August Update Edition. It pays a quarterly dividend of $0.30 ($1.20 per year), to yield 6% at the current price of $19.94. Total cost is $4,985.
We sold our REIT ETF but that does not mean we should abandon the sector altogether. Some REITs are faring better than others in the current environment. One of them is Granite REIT (TSX: GRT.UN), which was spun out of Magna International in 2011 to take over the properties on which the company’s plants are built. It has since diversified its holdings and operates internationally. The unit price has steadily moved higher since the March selloff and is now on the plus side for the year, closing on Aug. 21 at $78.22. The units pay a monthly distribution of $0.242 ($2.904 a year) to yield 3.7% at the current price. We will buy 60 units for a cost of $4,693.20.
To replace PMIF, we will add iShares Core U.S. Aggregate Bond Fund (NYSE: AGG), which tracks the performance of the overall American bond market. It is trading at US$118.68. This ETF has performed well this year, with a gain of about 7%. But that was due to the big drop in interest rates in March. Don’t expect a repeat. Rather, the fund offers us cash flow and stability. It pays monthly distributions, which have totaled $2.817 over the past 12 months for a trailing yield of 2.4%. We will purchase 50 units for a cost of $5,934.
There are some very good green energy stocks that pay a nice dividend and have done very well this year. One of the best is Innergex Renewable Energy Inc. (TSX: INE), which was originally recommended in this newsletter in July 2016 at $14.59. It’s now at $22.59 and pays a quarterly dividend of $0.18 ($0.72 a year) to yield 3.2%. We will buy 200 shares for $4,518.
That’s a total of $20,130.20 for these four securities. We will take $357.52 from cash to make up the difference, leaving us with $56.50.
In addition, we will buy another 10 units of BIP.UN at a cost of $590. That brings our total to 240 units and reduces our retained earnings to zero. We will take another $5.27 from cash to make up the shortfall, reducing the total cash reserve to $51.23.
After these moves, we now have $908.33 in cash and retained earnings. We move that money to a Renaissance High-Interest Account. It pays a meagre 0.3%, but I can’t find anything better for a RRIF. Any suggestions are welcome.
Here is the revised portfolio. I will review it again in February.
Income Investor RRIF Portfolio (revised Aug. 21/20)
|Security||Weight %||Average Cost||Shares/ Units||Book Value||Current Price||Market Value||Retained Earnings|
tii1704 | tii1816 | tii1904 | tii1916 | tii2003 | tii2016