Time flies when you’re having fun collecting dividends.
It’s been eight years since I launched my model Yield Hog Dividend Growth portfolio with $100,000 of virtual cash on Oct. 1, 2017.
Today, I’ll be doing a deep dive into the portfolio’s performance.
First, a quick recap of the portfolio’s mission.
When I started the model portfolio, my goal was to identify companies with above-average yields, a history of increasing their dividends and a high probability of continuing to do so. This led me to dividend-rich sectors including Canadian banks, utilities, power producers, pipelines, insurers and real estate investment trusts (REITs).
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The objective was to create a stream of dividend cash flow that would grow reliably year after year. I’m pleased to report that, despite a few bumps along the way (more on that in a moment), the portfolio has delivered exactly what it set out to do.
The portfolio’s income growth has been substantial. At inception, the 20 stocks and two exchange-traded funds in the portfolio were generating annualized income of $4,094, based on dividend rates at the time.
Thanks to scores of dividend increases and frequent reinvestments of cash to take advantage of compounding, the portfolio’s annualized income has more than doubled, reaching $8,388 as of Oct. 1. And I’m confident it will continue to grow.
In addition to churning out more cash every year, most of the stocks in the portfolio have enjoyed double-digit price gains. Driven by a combination of dividends and capital growth, the portfolio finished September valued at $208,241 – an increase of 108 per cent since inception. On an annualized basis, that works out to a total return of about 9.6 per cent.
Has everything gone perfectly? Nope. I had to kick out a handful of companies for bad behaviour. For example, when A&W Revenue Royalties Income Fund (which has since been acquired by its parent company) cut its distribution during the pandemic, I punted it from the portfolio because it no longer met the main criterion for inclusion. Similarly, I sold Algonquin Power & Utilities Corp. (AQN-T) and BCE Inc. (BCE-T) when it became clear that their high dividends were in jeopardy. Both companies later slashed their payouts.
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As solid as the portfolio’s returns have been, they have paled next to gains of U.S. stocks, particularly in the tech sector. The model portfolio has also trailed the S&P/TSX Composite Index’s total return by about two percentage points on an annual basis. The underperformance should perhaps not be surprising, given that surging interest rates in 2022 and 2023 compressed dividend stock valuations and raised borrowing costs for companies such as utilities and REITs that typically carry a lot of debt.
Such periods of underperformance are one reason I always remind investors to supplement their dividend holdings with index exchange-traded funds, which add diversification and the potential for higher returns. Dividend stocks haven’t always lagged the index, mind you. When I managed a previous model dividend portfolio from 2012 to 2017, it beat the Canadian index by more than four percentage points on an annualized basis over five years. This was during a period of very low – and falling – interest rates.
Why not just go with an all-ETF portfolio, you ask? The ETF strategy certainly has merit. It’s easier and less time-consuming than monitoring a portfolio of individual companies, and management expense ratios for dividend and broad index ETFs have been falling. The iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV-T), for example, charges an MER of just 0.11 per cent.
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When I started investing a few decades ago, there weren’t nearly as many ETF options available. Nowadays, with thousands of ETFs to choose from, an investor just starting out can build a well-diversified ETF portfolio with a couple of clicks. Both of my kids – one is 22 and the other 20 – are doing just that, with excellent results.
In my personal portfolio, I use a hybrid approach that includes individual dividend stocks and ETFs. This allows me to fine tune my exposure to certain companies and sectors. The strategy has served me well through good markets and bad, and I expect that it will continue to deliver solid returns.
Regardless of whether you invest in stocks, ETFs or a combination of both, the key to generating wealth is to stay invested and let dividend growth, dividend reinvestment and compounding work their magic.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.