In last week’s column, I discussed the performance of my model Yield Hog Dividend Growth Portfolio tgam.ca/3jDi8gn. The Globe and Mail also published a table of the portfolio’s latest returns tgam.ca/dividendportfolio.
Today, I’ll be responding to questions and comments from readers. This is an opportunity to clarify the model portfolio’s mission and to provide some context for the portfolio’s recent sluggish performance.
Let’s jump into the questions.
Why don’t you have any tech stocks in your model portfolio?
The portfolio does have a small amount of technology exposure through the iShares Core Dividend Growth ETF (DGRO), whose top two holdings are Apple Inc. (AAPL) and Microsoft Corp. (MSFT). But because the model portfolio’s mandate is to invest exclusively in dividend growth companies, high-flying tech stocks that don’t pay dividends, such as Shopify Inc. (SHOP), Amazon.com Inc. (AMZN) and Netflix Inc. (NFLX), are not included.
To reiterate what I have said before, the model portfolio is meant to be a source of ideas and to provide an illustration of dividend growth investing in action. The goal is not to provide a template for investors to copy exactly. The companies in the portfolio are just a sample of the many solid dividend growth stocks out there, which I highlight from time to time in my columns.
What’s more, while dividend investing has a long track record of success, it is not the only strategy that works. Technology and other growth stocks have produced exceptional returns in recent years, and there is no reason a dividend investor can’t diversify by also holding growth stocks directly or through ETFs such as the iShares Core S&P U.S. Growth ETF (IUSG), Vanguard Information Technology ETF (VGT) or the BMO Nasdaq 100 Equity Hedged to CAD Index ETF (ZQQ). (I wrote about these ETFs here tgam.ca/2QThmzm).
Just be mindful that many tech stocks have had a massive run because they are seen as a safe haven during the pandemic and their valuations in many cases have become stretched. That makes these momentum-driven names vulnerable to sharp selloffs such as the two-day skid that wiped more than 6 per cent from the Nasdaq Composite Index on Thursday and Friday.
Why do you have only four of the Big Five banks? Do you have something against Bank of Nova Scotia (BNS)?
Not at all. I left BNS out simply because, when I was starting the portfolio in 2017, I had already added four banks and was happy with the portfolio’s weighting to the sector. Nothing more to it than that.
What is the process being followed here?
As the portfolio’s name implies, the goal is to identify stocks that have a history of raising their dividends and a strong likelihood of continuing to raise them. If their dividends grow – supported by rising revenues and earnings – their share prices should also climb over the long run. There are emotional benefits as well. I’ve found that, if my income is growing steadily, I’m less likely to get rattled by short-term market volatility. Since the portfolio’s inception on Oct. 1, 2017, its annual dividend income has grown about 35 per cent, driven primarily by a combination of dividend increases and dividend reinvestments. A secure cash-flow stream that grows over time is one of the secrets to achieving financial freedom.
Your year-to-date performance is terrible. You should get another job – preferably one you are good at.
Now, now. As I said in my column last week, the portfolio’s year-to-date total return through Aug. 27 was negative 6.1 per cent. What I neglected to mention is that this was actually better than many dividend exchange-traded funds over the same period.
The iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ), for instance, returned negative 11.9 per cent (all return figures include dividends). The BMO Canadian Dividend ETF was down 11.7 per cent. And the Horizons Active Canadian Dividend ETF (HAL) was off 7.4 per cent. Several other dividend ETFs also trailed the model portfolio.
Clearly, it hasn’t been a great year for dividend stocks in general. But a period of short-term weakness is not a reason to abandon a strategy with a proven long-term track record.
Some readers may recall that, prior to starting the current portfolio (which, despite the recent drop, is still beating the S&P/TSX since inception in 2017), I managed a similar model dividend growth portfolio from 2012 to 2017. That portfolio produced a five-year annualized return of 11.6 per cent – topping the S&P/TSX composite index’s annualized total return of 7.2 per cent. (Google “Dividend investing works: Here’s five years of proof.”)
Every investing strategy hits a rough patch at some point, but this is hardly a time for panic.
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.
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