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yield hog

Some people celebrate Canada Day by wearing red and white or heading out to watch the fireworks. I like to express my patriotism by adding up all the dividend increases from the Canadian companies in my model Yield Hog Dividend Growth Portfolio.

This year, dividends have been one of the few bright spots for investors.

Despite the war in Ukraine, sinking stock markets, surging inflation, supply-chain disruptions and the lingering COVID-19 pandemic, 12 of the 22 securities in my model portfolio increased their dividends through the first six months of 2022. And I am confident we’ll be seeing many more increases in the second half of the year.

Am I surprised? Not really. When I launched the model portfolio with $100,000 of virtual cash on Oct. 1, 2017, my goal was to identify companies with a track record of increasing their dividends and a high probability of continuing to do so.

My stocks have not let me down. As of July 1, the portfolio is cranking out a projected $6,598 in annual dividend income, based on current dividend rates (which, as I said, will almost certainly continue to rise). That’s up from annualized dividend income of $4,094 at the portfolio’s inception – an increase of 61.2 per cent.

Dividend increases alone don’t get all the credit for the portfolio’s substantial income growth. I have also reinvested my dividend cash regularly to acquire additional shares, which in turn produce more dividends, and so on. It’s a virtuous circle that maximizes the power of compounding.

Share price appreciation has also contributed to the model portfolio’s returns. As of July 1, the portfolio was valued at $148,035.87, representing a total return – from dividends and capital growth – of 48 per cent since inception, or 8.6 per cent on an annualized basis. That compares with a total return of 39.2 per cent for the S&P/TSX Composite Index over the same period, or an annualized return of 7.2 per cent.

I’d love to take all the credit for outperforming the index. But with Shopify Inc. SHOP-T – once the largest company by market capitalization in the S&P/TSX – getting crushed over the past seven months, I’ve had some help. That’s one more reason to love dividend stocks: They don’t give you the same high-octane gains as growth stocks, but when markets go south the declines are often not nearly as severe.

My portfolio is proof of that. For the year to date, it’s down just 4.3 per cent on a total return basis, compared with a drop of 9.9 per cent for the S&P/TSX, also including dividends.

Even as markets have been tumbling in recent months, my model portfolio has accumulated more than $1,600 of dividend cash. I’ll be reinvesting that money soon, so watch this space.

My spouse and I have recently retired and would like to pivot from a growth to an income portfolio. Your model Yield Hog Dividend Growth Portfolio interests us, but we have a question. Should we purchase each of the 22 individual securities in equal dollar amounts, or would it be better to purchase each stock in proportion to its current market value compared with the total current portfolio value?

My model portfolio is meant to be a source of investing ideas and to illustrate how dividend growth investing works. However, I don’t recommend that you copy the portfolio exactly. Although I have chosen what I believe are some of the most stable dividend companies, there are many great stocks that I didn’t include simply because it would have been too unwieldy to monitor 30, 40 or 50 companies.

What’s more, the portfolio is heavily focused on Canada and some investors might prefer more exposure to U.S. or international markets.

Keeping that in mind, if you are starting a dividend portfolio from scratch, it makes sense to weight each stock roughly equally at first, as I did with my model portfolio. If one of your holdings appreciates substantially, you could make a judgment as to whether you need to trim its weighting to control your risk. However, I usually give my stocks a lot of room to run and don’t trim unless the valuation has gotten way out of line. But that is rare, because dividend stocks, in general, aren’t prone to the same speculative frenzies – or nasty share price collapses – that affect high-growth companies that pay no dividends.

I also strongly recommend that you diversify your portfolio with two or three index exchange-traded funds – one covering the Canadian market, another for U.S. stocks and perhaps an international ETF as well. As much as I love dividend stocks, they tend to be overrepresented in certain sectors in Canada. Adding a few ETFs will give you exposure to a broader selection of companies and help to reduce concentration risk.

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