I am a lifelong dividend investor, but 2020 was the third year in a row I have badly underperformed the Canadian and U.S. indexes. Now, I am questioning my strategy. Specifically, three stocks – Inter Pipeline Ltd. (IPL), Wells Fargo & Co. (WFC) and Altria Group Inc. (MO) – have left me thinking I should be simply buying index ETFs rather than trying to hold a basket of dividend payers. How do you know when to throw in the towel?
If it makes you feel any better, my model Yield Hog Dividend Growth Portfolio also had a rough year. It delivered a total return of negative 0.5 per cent in 2020, trailing the S&P/TSX Composite Index’s total return of 5.6 per cent. The good news is that, even after a lousy 2020, the model portfolio’s total return of 25.6 per cent since inception on Oct. 1, 2017, still leads the S&P/TSX’s total return of 23.5 per cent over the same period. (Total return figures include dividends.)
But let’s be honest: Those returns pale next to the scorching performance of the S&P 500. Even amid a global pandemic, the S&P 500 posted a total return of 18.4 per cent in 2020. And the S&P 500 has soared 58.7 per cent since my model portfolio was launched in 2017.
So is it time to throw in the towel on dividend investing? I don’t think so. Unfortunately, you stepped on a few land mines in 2020: Inter Pipeline and Wells Fargo both cut their dividends, and Altria Group’s share price tanked even though the company raised its payout. But plenty of U.S. and Canadian dividend growth stocks put up returns well into the double digits. Examples include Microsoft Corp. (MSFT), Apple Inc. (AAPL), Brookfield Infrastructure Corp. (BIPC), Brookfield Renewable Corp. (BEPC) and Innergex Renewable Energy Inc. (INE). (Full disclosure: I own BIPC, BEPC and INE personally.)
Rather than give up on dividend investing, consider adopting a hybrid strategy. You could, for example, hold a core group of dividend stocks including Canadian banks, utilities, power producers and telecoms. These stocks are on the conservative end of the risk spectrum, pay above-average yields and raise their dividends regularly, providing you with a growing income stream.
To add some diversification, consider investing in one or more index ETFs. Information technology stocks have been a huge driver of the S&P 500′s performance, but many of these stocks pay no dividends, which is one reason dividend strategies have lagged in recent years. By investing in an ETF that tracks the S&P 500 – which has 28-per-cent weighting in tech stocks – you’ll get exposure to this important sector, plus hundreds of other companies.
In my personal portfolio, I own a mix of individual dividend growth stocks and Canadian and U.S. index ETFs, and I’ve been pleased with the results. Of course, if you don’t want to own individual stocks, there’s no reason you can’t go with an all-ETF portfolio.
I have a non-registered brokerage account in the high six figures that contains 12 stocks. At the moment, however, three companies – Canadian National Railway Co. (CNR), WSP Global Inc. (WSP) and Brookfield Renewable Partners LP (BEP.UN)/ Brookfield Renewable Corp. (BEPC) – account for 43 per cent of my holdings. I still like all of these and would take a huge capital gain if I sold. My question: How much is too much in a portfolio? Would it be prudent to take some action? I am thinking of donating some BEP.UN/BEPC to a charity next year as one way of rebalancing.
If you were starting a portfolio from scratch, would you allocate 43 per cent of your capital to just three companies? My guess is you would not. Doing so would violate the basic principles of diversification, the purpose of which is to control your risk.
However, your situation is complicated by the fact that you would face capital gains tax if you were to trim any of your positions to achieve better diversification.
With that in mind, here are some things to consider: How much tax would you pay if you were to sell a portion of your biggest holdings? (Remember that capital gains are taxed at half the rate of regular income.) Do you have unused capital losses from previous years that you could carry forward to offset some of the capital gains? Are you expecting to be in a lower tax bracket this year, or in a future year, when triggering a capital gain would result in a less severe tax hit?
There is an old investing adage that says you should “let your winners run.” If your stocks continue to climb, following this advice will, of course, work out just fine. But if one or more of your companies stumbles, you might regret not rebalancing. Ultimately, you’ll have to decide, taking into account your confidence in the companies and your comfort level with the risks of not rebalancing.
As for donating some of your BEP.UN/BEPC shares to charity, I think it’s a fine idea – particularly given that so many people are in need these days. (Note that while Brookfield Renewable is one company, it has two types of shares.) When you donate listed securities that have appreciated in value, you benefit in two ways: You avoid capital gains tax, and you receive a charitable donation receipt. Depending on the province or territory, your gift would produce a tax credit worth at least 40 per cent of the fair market value of the shares. (This assumes you have already made $200 in charitable donations, as the charitable tax credit is significantly higher above this threshold.)
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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