I’ve been accumulating cash in my model Yield Hog Dividend Growth Portfolio, and now it’s time to go shopping.
Before I reveal how I’m reinvesting my cash, I’ll quickly recap the portfolio’s performance.
First, the bad news: Year-to-date through Aug. 27, the model portfolio posted a total return – including share price changes and dividends – of negative 6.1 per cent. That compares with a total return of about 2 per cent for the S&P/TSX Composite Index.
I can think of at least two reasons my portfolio has lagged the S&P/TSX this year: I don’t hold Shopify Inc. (SHOP) or Barrick Gold Corp. (ABX). Shopify has soared about 168 per cent in 2020 and is now the largest constituent in the index, while Barrick has surged about 60 per cent and has the seventh-biggest weighting.
Now, the good news: Even after the recent skid, the portfolio is still outperforming the S&P/TSX since the portfolio’s inception on Oct. 1, 2017. As of Aug. 27, the portfolio – which started with $100,000 of virtual cash – was worth $118,500, which represents a total return of 18.5 per cent, compared with a total return of 17.2 per cent for the index over the same period.
Big deal, right? Well, maybe this will impress you: Thanks to a combination of dividend increases and reinvestments, the portfolio’s projected annual income has grown by 33 per cent since inception. It is now churning out annual income – based on current dividend rates – of about $5,453, up from $4,094 initially. Despite the recent sluggish performance, the model Yield Hog Dividend Growth Portfolio is very much living up to the “dividend growth” part of its name.
Even during the coronavirus pandemic, the dividend hikes have kept coming. In July, Capital Power Corp. (CPX) hiked its dividend by 6.8 per cent. And in August, CT Real Estate Investment Trust (CRT.UN) raised its distribution by 2 per cent. I expect that we’ll see increases from several other portfolio companies before the end of the year.
Now, let’s talk about reinvesting those dividends.
Buying good companies when their shares have suffered a setback can be a profitable investing strategy. With the pandemic causing upheaval in the restaurant business, shares of Restaurant Brands International Inc. (QSR) are down about 18 per cent from their prepandemic levels in February.
But the owner of Tim Hortons, Burger King and Popeyes has seen a gradual improvement in business as confirmed infections have fallen and as the company and its customers have learned to live with the virus by wearing masks and following physical-distancing guidelines.
As of the end of July, Tims’ same-store sales were down by mid-teens on a percentage basis, a big improvement from being down more than 40 per cent in the last two weeks of March. Burger King’s sales as of late July were tracking flat compared with a year earlier, having dropped more than 30 per cent in March. And sales at Popeyes – thanks to its popular chicken sandwich – have recently been up in the high twenties on a percentage basis, after being flat in March.
One concern is that Restaurant Brands’ store openings have slowed to a crawl because of the virus. But management has said it expects unit growth to resume in 2021 at about 5 per cent – similar to levels in 2018 and 2019.
“We view this as achievable, and do not think long-term unit growth prospects have dwindled,” CIBC World Markets analyst Mark Petrie said in a note in which he reiterated an “outperformer” rating on the shares. “As far as defensive businesses go in the pandemic, we continue to view RBI as among the best placed in our coverage universe.”
By adding another 10 shares to my Restaurant Brands position – bringing my total to 80 shares – I’m getting paid a 3.8-per-cent yield to wait for the business to recover.
I also picked up an additional 10 shares of Bank of Montreal (BMO) after the bank’s surprisingly strong third-quarter results, bringing my total to 70 shares. BMO’s yield is even more attractive, at 5 per cent. (Note: Both “purchases” were executed at Wednesday’s closing prices and consumed $1,552.80 of cash in total).
When the pandemic passes and the economy gets back on its feet, I expect we’ll see both stocks post solid gains. In the meantime, I’ll continue to collect my dividends and reinvest them periodically to harness the power of compounding. Globe Unlimited subscribers can view the full portfolio at tgam.ca/dividendportfolio, where a new monthly update will be published next week.
Full disclosure: The author owns shares of QSR and BMO personally.
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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John Heinzl