Last week, I discussed my model Yield Hog Dividend Growth Portfolio’s five-year returns. Today, I’ll be responding to questions and comments that readers e-mailed or posted online.
Do you plan to start a new portfolio now that your five-year returns are in, as you did with your previous model dividend portfolio?
No. I plan to continue managing the current portfolio. The previous model portfolio was wound up in 2017 after five years because it was part of The Globe and Mail’s Strategy Lab series, which was coming to an end. That’s not the case with the current portfolio. As always, I’ll continue to update readers whenever I buy or sell a security.
Did I miss something or did you fail to provide year-to-date numbers, which would really reflect how your portfolio will perform as long as inflation is a factor, which could be a long time? Smoke and mirrors prevail.
No smoke and mirrors here. I manage the portfolio as transparently as possible. If you’re a Globe Unlimited subscriber, you can view monthly updates at tgam.ca/dividendportfolio, where you can also download the portfolio spreadsheet each month. You’ll also find an archive of my columns and monthly updates at globeandmail.com/authors/john-heinzl.
I understand that some investors are interested in year-to-date returns, calendar returns or returns for other periods; readers can calculate these numbers themselves by looking up past portfolio updates in the archives. As a buy-and-hold investor focused on long-term results, the number I’m most interested in is the total return since inception. This is included in every monthly update. In my columns, I often convert the return since inception to an annualized figure, which I then compare with the performance of the S&P/TSX Composite Index to benchmark my performance.
I enjoy your column and couldn’t agree more on the dividend strategy. However, you lost me at “yield on cost,” which many have called irrelevant at best. Perhaps you should refer back to your 2016 column, Don’t Fall for the ‘Yield on Cost’ Myth.”
My views about yield on cost haven’t changed.
Yield on cost is the annualized income of a stock (or, in this case, portfolio), divided by its original cost. I included the model portfolio’s yield on cost – 6.83 per cent – because it’s an easy way to demonstrate the positive impact of dividend growth and dividend reinvestment. Specifically, the longer you hold a stock with a growing dividend, and the more dividends you reinvest, the higher the yield on your original cost will be.
As I’ve pointed out in previous columns, however, yield on cost and the more commonly used dividend yield are two very different measures. Both use annual income in the numerator, but yield on cost has a historical, out-of-date price in the denominator, whereas dividend yield uses the stock’s current price. The myth I was referring to is that some investors believe – and a few have tried to convince me – that a high yield on cost is a reason to hang on to a stock, because dividend yields available in the marketplace are typically lower. This reasoning is flawed.
An example will demonstrate why. Say you bought 100 shares of Fortis Inc. (FTS) 10 years ago. At the time, the stock was trading at $33 and the company was paying $1.20 in dividends annually, for a yield of 3.6 per cent. Having raised its dividend every year since then – including an increase announced in late September – Fortis is now paying $2.26 annually. Your yield on cost would therefore be 6.8 per cent ($2.26/$33).
That’s great. But it doesn’t mean you are earning 6.8 per cent on your money. Why not? Because you effectively have more money at stake now. Fortis’s share price is trading at $50.80, not $33, so your capital has grown. The return you are earning on that capital is 4.4 per cent ($2.26/50.80), which is Fortis’s dividend yield.
Bottom line: When evaluating income-producing investments, the number that matters is the dividend yield. There’s nothing wrong with calculating the yield on cost, but comparing it to the dividend yield of other stocks is a case of apples and oranges.
Why have you hung on to Choice Properties REIT (CHP.UN) when its unit price is lower than it was in 2017, and it hasn’t raised its distribution in years?
When I launched the portfolio in 2017, I originally held Canadian REIT, which had a long history of increasing its distribution. Choice acquired Canadian REIT in 2018, after which distribution hikes dried up as the two REITs combined their operations. I’m still hopeful that Choice will resume distribution increases at some point. In the meantime, it pays an attractive yield of 6 per cent and has a strong balance sheet, deep pipeline of development opportunities and a very stable major tenant in Loblaw Cos. Ltd., whose grocery and drugstore banners account for about 57 per cent of Choice’s gross rental revenue. What’s more, REIT unit prices in general have weakened because of rising interest rates and recession fears. If I were ever going to sell Choice – and I’m not saying I plan to – it would not be at these depressed levels.
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John Heinzl