It’s been five years since I launched my model Yield Hog Dividend Growth Portfolio. Today, I’ll be taking a detailed look at how the portfolio has performed.
With markets getting pounded over the past several weeks, the five-year anniversary hasn’t come at the most opportune time. Still, I think you’ll agree that the results validate the dividend-growth investing strategy. Despite facing myriad challenges over the past few years – a global pandemic, massive supply chain disruptions, rising interest rates, surging inflation, war – the portfolio delivered solid gains.
Before I dig into the details, allow me to quickly recap the portfolio’s mission.
When I started the portfolio on Oct. 1, 2017, with $100,000 of virtual cash, my goal was to identify blue-chip companies with a history of raising their dividends and a strong likelihood of continuing to do so. As a risk-averse, buy-and-hold investor, I wasn’t interested in swinging for the fences. Good thing, too, because a lot of formerly high-flying stocks have come crashing back to earth. Canopy Growth Corp. WEED-T or Shopify Inc. SHOP-T, anyone?
Rather, I was aiming to generate a sustainable and growing stream of dividend income, along with steady capital gains, without taking on a lot of risk.
So how did the portfolio make out?
Well, as of Sept. 30, it was worth $142,852.78, representing a total return of 42.9 per cent since inception. On a compound annual basis, that works out to a return of 7.4 per cent, compared with a gain of about 6.5 per cent for the S&P/TSX Capped Composite Total Return Index over the same period. (All total return figures include dividends.)
Granted, I didn’t exactly crush the index, but this is the second consecutive five-year period in which my dividend growth strategy has outperformed the S&P/TSX. (I summarized my previous portfolio’s performance in a 2017 column titled “Dividend investing works: Here’s five years of proof.”)
I can hear the skeptics: “A hundred grand? That’s all? And it’s not even real money.” True, the money in the model portfolio isn’t real, but I own all of the stocks personally, so this is more than a theoretical exercise. As for the dollar amounts, go ahead and add an extra zero – or two or three – if you want to see how the portfolio would have performed with a larger initial sum. Had the portfolio started with $1-million, for instance, it would be worth $1,428,527.80 today.
Remember, too, that no new capital was added along the way, apart from reinvesting dividends when sufficient cash had accumulated. In real life, most people continue contributing to an investment portfolio.
Now, let’s talk about those dividends. This is where things get interesting.
At inception, the portfolio was generating $4,094 of projected annual income, based on dividend rates at the time, for a yield of about 4.1 per cent ($4,094/$100,000).
Five years later, thanks to dozens of dividend increases and regular reinvestments of cash, the portfolio’s annual income has grown to $6,833 – an increase of 66.9 per cent – and the yield is now about 4.8 per cent. The higher yield reflects the fact that the portfolio’s annual income has grown at a faster rate than its total value.
Some investors also like to look at a measure called “yield on cost.” This is calculated by dividing the current annual income of $6,833 by the portfolio’s initial cost of $100,000, which works out to a yield on cost of 6.83 per cent. In other words, for every $100 invested originally, the portfolio is now generating $6.83 of dividend income annually. And that number will almost certainly continue to rise in the months and years ahead.
This underlines one of the key benefits of the dividend growth strategy: It increases your income and protects your purchasing power from inflation, which is a chief concern for many people right now. Whether you’re retired or still working and want to supplement your cash flow, a portfolio of dividend growth stocks can help.
Not every investment worked out as I had hoped. That’s invariably the case, which is why diversification is so important. A handful of stocks – including Manulife Financial Corp. MFC-T and Canadian Utilities Ltd. CU-T – are underwater since I bought them (excluding dividends). And several real estate investment trusts – namely Canadian Apartment Properties REIT CAR-UN-T, Choice Properties REIT CHP-UN-T and SmartCentres REIT SRU-UN-T – have put distribution increases on hold.
But on the whole, I’m pleased with the portfolio’s performance, notwithstanding the fact that many of the stocks have been hammered over the past few weeks. Their prices will recover in time and, regardless of how the current market turmoil plays out, I’m confident that most of the stocks in the portfolio will continue to increase their dividends.
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John Heinzl