I’ve been sitting on a pile of “cash” in my model dividend portfolio.
Now, it’s time to go shopping.
First, I’ll provide a brief update on the portfolio’s performance.
Through Feb. 18, the model Yield Hog Dividend Growth Portfolio posted a total return – including dividends – of nearly 30 per cent since inception on Oct. 1, 2017. This works out to an annualized total return of about 8.1 per cent, which is in line with the S&P/TSX Composite Index’s annualized total return over the same period.
Capital gains are wonderful, but the portfolio’s core mission is to generate a growing income by investing in stocks that raise their dividends regularly. On that score, the portfolio continues to deliver.
So far in 2021, five companies in the portfolio have hiked their payouts. Some increases were modest: Canadian Utilities Ltd. (CU) and Restaurant Brands International Inc. (QSR) hiked their payouts by 1 per cent and 2 per cent, respectively.
Others were more substantial. BCE Inc. (BCE) and Brookfield Infrastructure Partners LP (BIP.UN) both raised their dividends by about 5 per cent, and TC Energy Corp. (TRP) announced an increase of 7.4 per cent.
Thanks to these and dozens of other increases – plus regular dividend reinvestments – the portfolio is now churning out about $5,747 of dividend income annually, based on current dividend rates, up from $4,094 at inception, for an increase of 40 per cent. The portfolio’s value, meanwhile, has risen to $129,953 from an initial $100,000.
(Note: The model portfolio’s dollars are virtual, but I own all of the stocks personally and can confirm that the dividend growth strategy works just as well in the real world.)
Today, I’m announcing two purchases that will give the portfolio’s income another boost.
First, I’ve added 50 shares of Telus Corp. (T), for a total of 250 shares.
Telus offers an attractive dividend yield of 4.8 per cent. What’s more, the company is aiming to increase its dividend at an annual rate of 7 to 10 per cent through the end of 2022. Dividends aren’t official until the board declares them, but based on Telus’s recent performance and future growth potential I am confident the company will deliver.
This month, Telus announced strong fourth-quarter subscriber numbers and completed an initial public offering of Telus International, which provides digital services to more than 600 companies. Telus retained control of Telus International and will continue to benefit from its growth as a publicly traded company.
Telus has several other subsidiaries – such as Telus Health and Telus Agriculture – that will also contribute to growth in coming years, in addition to its core wireless, internet and TV businesses that provide a steady source of cash flow.
“We view Telus as the ‘growth play’ within the sector,” Drew McReynolds, an analyst with RBC Dominion Securities, said in a recent note.
For my second purchase, I’ve added 50 units of SmartCentres Real Estate Investment Trust (SRU.UN), bringing my total to 115 units. (Note: Both purchases were recorded on Tuesday, using the day’s closing prices, for a total cost of $2,580.)
Like most REITs, SmartCentres has taken a hit from the pandemic. But unlike many REITs, it has maintained its distribution, which yields 7.4 per cent.
SmartCentres has benefited from improving rent collections (which averaged 94.5 per cent in the fourth quarter), supported by a retail portfolio in which 60 per cent of tenants are considered essential such as grocery stores and pharmacies. The fact that 75 per cent of SmartCentres’ retail properties are anchored by a Walmart – which accounts for more than 25 per cent of the REIT’s revenue – has also helped.
Another strength is SmartCentres’ deep pipeline of development projects that are now contributing to its bottom line. Condo sales at its Transit City 1 and 2 towers in Vaughan, Ont., for example, brought in funds from operations of about $45-million in the second half of 2020, with a third tower expected to contribute another $25-million in 2021.
On the fourth-quarter conference call, executive chairman Mitchell Goldhar said SmartCentres can sustain its distribution, citing a payout ratio that is “solid and conservative enough” at about 87 per cent of adjusted cash flow from operations (ACFO).
Using a different cash-flow measure called adjusted funds from operations (AFFO), CIBC World Markets analyst Dean Wilkinson calculated a higher payout ratio of 99 per cent. Yet he also believes the distribution is sustainable.
“While normally this would be considered an elevated level, the REIT’s ample liquidity (including almost $800-million in cash) should serve to temper concerns surrounding a potential distribution cut,” Mr. Wilkinson said in a recent note.
That’s not to say the distribution is bulletproof. In a worst-case scenario that includes extended lockdowns and vaccine delays, the distribution “may warrant further examination,” he said.
Such risks notwithstanding, Mr. Wilkinson said the units are trading at a discount of about 19 per cent to the REIT’s net asset value – a level he considers excessively steep.
As the pandemic recedes, “we believe that patient investors will be rewarded with material valuation expansion,” he said.
View the complete model Yield Hog Dividend Growth Portfolio online at tgam.ca/dividendportfolio.
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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