Gordon Pape: My high-yield income portfolio posts big gains, but it’s time to boost cash flow (2024)

Our High-Yield Portfolio is mainly designed to generate above-average income, but over the past six months it has also posted a large capital gain.

I created this portfolio nine years ago, in March, 2012. It is designed for readers looking for above-average cash flow and who can handle a higher level of risk.

This portfolio invests entirely in stocks, so it is best suited for non-registered accounts in which any capital losses can be deducted from taxable capital gains. Also, a high percentage of the payments will receive favourable tax treatment as eligible dividends or return of capital.

The initial value was $24,947.30, and I set a target average annual total rate of return of 7 per cent to 8 per cent, with an annual yield of about 5 per cent.

Here is a review of the securities we own and how they have performed in the time since our last review in September. Results are to March 19.

Enbridge Inc. (ENB-T). Investors finally figured out that a pipeline company with solid earnings and a dividend yield of more than 8 per cent was not a bad place for their money at a time of low rates. The shares are up $5.14 from the last review in September, and the company raised its quarterly dividend by 3.1 per cent, to 83.5 cents ($3.34 a year) effective with the February payment. Because of the price rise, the yield is down to 7.4 per cent, which is still high for a company of this quality.

Pembina Pipeline Corp. (PPL-T). Pembina continues to pay its monthly dividend of 21 cents a share, and the company prides itself on having been able to maintain it throughout the pandemic and last year’s drop in oil prices. Investors are starting to believe; the shares are up almost $7 since the last review. At the current price, the yield is 6.8 per cent.

Sun Life Financial Inc. (SLF-T). Banks and insurance companies profit when interest rates are rising. So, the recent upsurge in sovereign yields was good news for this stock, which is up almost $10 a share since the last review. The yield is unchanged at 55 cents a quarter ($2.20 a year). The price increase has pushed down the yield to 3.4 per cent.

Capital Power Corp. (CPX-T). This stock continues its recovery from last year’s sell-off, gaining $6.85 in the latest period. The quarterly dividend was raised 6.9 per cent last September, to 51.25 cents a share ($2.05 a year). The stock yields 5.7 per cent at the current price.

Canadian Imperial Bank of Commerce (CM-T). As mentioned, rising interest rates are good for banks and insurers. CIBC shares responded strongly, rising $24.85 since our last review. The quarterly dividend is $1.46 and is fixed at that level until the Office of the Superintendent of Financial Institutions lifts its prohibition on payout hikes. Because of the increase in the share price, the stock’s yield is down to 4.6 per cent. That’s still high for a Big Five bank, but it’s down from 7 per cent at this time a year ago.

Brookfield Energy Partners LP (BEP.UN-T). This Bermuda-based limited partnership was added to the portfolio in September, 2019. It invests in an international portfolio of clean energy properties, mainly hydro. At the end of July, investors received one share in a new company, Brookfield Renewable Corp. (BEPC-T) for every four units of BEP. Then, in December, the shares of both BEP.UN and BEPC split three-for-two. The net result was a nice gain for investors. The distribution will be increased by 5 per cent with the March 31 payment.

BCE Inc. (BCE-T). We added BCE to this portfolio about a year ago. The shares are trading at just about the same level, but the quarterly dividend was raised by 5 per cent this month, to 87.5 cents ($3.50 a year). The stock yields 6.3 per cent at the current price.

AT&T Inc. (T-N). This giant U.S. telecom was also added about a year ago. As with BCE, the shares are trading at about the same price as when we bought them. The quarterly dividend is 52 US cents (US$2.08 annually) for a yield about 7 per cent.

Algonquin Power & Utilities Corp. (AQN-T). This is another recent addition. It’s a green energy company that traded as high as $22.67 earlier this year. It has pulled back but is still ahead by almost $1 since our last review. The dividend yield is 4 per cent.

North West Co. Inc. (NWC-T). This company has a long history, with a prime focus on general stores in Northern Canada and Alaska. The shares are up only 15 cents since the last review, but we received a 9.1-per-cent increase in the quarterly dividend at the end of September, to 36 cents a share ($1.44 annually). The yield is up to 4.1 per cent as a result.

We earned $21.57 from the cash we deposited in an account with Motive Financial that paid 1.75 per cent at the time.

The accompanying table shows what the portfolio looked like as of the close of trading on March 19. The weighting is the percentage of the market value of the security in relation to the total market value of the portfolio. The gain/loss shows the performance of the security since inception, or since it was added to the portfolio. Sales commissions and exchange rates are not considered.

Comments: The portfolio is doing well, gaining 16.7 per cent in the latest review period. All the stocks in the portfolio gained ground, with the largest contributions coming from CIBC and Sun Life.

With the latest gain, we are showing a total return of 133.9 per cent since inception, which translates into an average annual gain of 9.9 per cent, which is above our target range.

In terms of cash flow, the portfolio earned $1,212.25 in six months for a yield of 2.4 per cent in that time. Over a full year, that would work out to about 4.8 per cent, slightly below our 5-per-cent target.

Changes: To boost our yield a bit, we’ll add another 10 shares of BCE at $56.74, to bring our total to 70. The cost will be $567.40. We’ll take $202.44 from retained income and the remaining $364.96 from our cash reserve, reducing that total to $976.28.

Everything else remains the same.

Our retained earnings plus cash now total $3,109.74. We’ll keep this amount in our Motive Financial Savvy Savings Account, which is now paying 1.25 per cent.

Here is the revised portfolio. I will review it again in September.

Editor’s note: Gordon Pape’s High Yield Portfolio produced a 9-year average annual return of 9.9 per cent, not 10.25 per cent as reported initially. This version has been updated.

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