John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
It's been nearly five months since I reinvested any of the dividends in my Strategy Lab model dividend portfolio, and I've accumulated a cash balance of more than $1,500.
Today, I'll be putting most of that virtual money to work. As I've written many times, reinvesting dividends is one of the keys to building wealth because it harnesses the power of compounding, which (along with patience) is perhaps your biggest ally as an investor.
Before I reveal how I'll be spending my cash – hint: It's a company regular that Yield Hog readers will know quite well – I'll quickly recap how the portfolio has been performing.
When Strategy Lab was launched in September, 2012, each of the four participants started with $50,000 in virtual cash to invest according to their chosen style (dividends, growth, indexing or value investing). As of May 31, my dividend portfolio was worth $74,758.83, for a total return of 49.5 per cent – or 11.4 per cent on an annual basis, compared with 6.7 per cent for the S&P/TSX composite index (all return figures include dividends).
I'm especially pleased with how the portfolio has been performing recently. Through the first five months of 2016, it gained 10.4 per cent, which is tops among the four Strategy Lab model portfolios, although it still trails the growth and value portfolios since inception.
I haven't hit any home runs, mind you, but most of my stocks have produced steady, reliable gains without a lot of volatility – which is exactly what one would expect of a conservative dividend portfolio. My stocks have also excelled when it comes to raising their dividends regularly – the most recent examples being Bank of Montreal and Telus in May and Procter & Gamble and Johnson & Johnson in April.
Thanks to these and dozens of other dividend increases, my portfolio's income has grown substantially. At inception, my portfolio generated $1,875.84 in projected annual income based on dividend rates at the time. It's now churning out $2,995 – a gain of nearly 60 per cent. Dividend reinvestment and a falling Canadian dollar have also helped.
Now, about the cash that's been building up.
Recently, I wrote about one of my current holdings, Brookfield Infrastructure Partners LP, which owns a global portfolio of assets including railways, ports, utilities, toll roads, pipelines and communications towers. These long-lived assets produce steady, predictable returns that tend to rise over time. What's more, Brookfield Infrastructure is always on the hunt for acquisitions to keep its business – and its distribution – growing, which makes its current yield of about 5.2 per cent even more appealing.
I was already considering adding to my position when, subsequent to writing that column, I read a note from a Raymond James analyst who raised his price target on the stock – to $54 (U.S.) from $50 – and reiterated a "strong buy" rating. (The units closed Tuesday at $43.82 on the New York Stock Exchange and $56.14 (Canadian) on the Toronto Stock Exchange.) The analyst, Frederic Bastien, said Brookfield Infrastructure is "working on five exclusive deals in Brazil" and cited the potentially high returns available on electricity and natural gas transmission assets purchased during the country's current recession. "Management knows it must strike while the iron is hot, however, as the opportunity window will likely shut the moment Brazil starts showing signs of stabilization," Mr. Bastien said.
What's more, Brookfield Infrastructure's electric and gas utilities in Britain are "growing gangbusters" – helped by the rollout of smart meters – and are set to overtake rail next year as its largest business. These initiatives, combined with other organic investments, indicate that Brookfield Infrastructure could be poised for a period of strong returns, he said.
Brookfield Infrastructure's chief executive officer Sam Pollock is also upbeat. "We are very excited that our current backlog of projects, which has never been as large, could lead to another period of outperformance," he said on the first-quarter conference call in May.
Brookfield Infrastructure checks off a lot of the attributes I look for in a stock: Great assets, predictable cash flows, a rising distribution and a management team that's focused on generating value for shareholders. That's why I've decided to spend most of the cash in my model dividend portfolio to purchase 25 additional units, bringing my total to 145.