A Diversified 4.69% Yielding Portfolio


Telly recently left a comment on my Top 5 Reasons Why Dividend Investing Over ETF post expressing her skepticism that anyone can build a diversified portfolio yielding over 4% “without loading up on some income trusts which are not favourably taxed or becoming less diversified by owning only high yielding dividend companies.”

I figure it would be a fun exercise to build this high-yielding diversified portfolio, although I wouldn’t shy away from income trusts. In my opinion, income trusts are an absolute key ingredient to sprinkle over a diversified portfolio. Just because some our best Canadian cash cows are structured as income trusts doesn’t mean we should place them in the penalty box:

  • Canadian Oil Sands - a 33 year life reserve of tarsand with no exploration risks like most other energy trusts.
  • Consumers Waterheater - Torontans take warm showers recession or not.
  • CML Healthcare - a highly profitable diagnostic, laboratory testing and medical imaging services business that is pouring out distributions from its opearational cash, and while paying back debts at the same time.
  • InterPipeline - a stable and low payout ratio pipeline trust that’s not sensitive to commodity prices. I covered IntePipeline in a previous post.
  • H&R REIT - any diversified portfolio must include real estate. With H&R REIT, you get a little bit of office, a little bit of retail, and a little bit of US. I’ll cover this particular REIT in a future post.

I put this hypothetical 20-stock $100,000 portfolio together based on Friday’s closing prices. I started initially with a list of 30 stocks, and then painstakingly chopping it down to 20, although I’m the first to admit that investors should stick with 30 or more just to spread the eggs around.

As many know, the TSX composite is uncomfortably concentrated in the financial, energy and materials sectors. So, one of my main objectives is to diversify away from these them and place heavier emphasis on real estate, health care, consumer and pipeline stocks/income trusts.

Incidentally, I purposely left out Russel Metals, Manitoba Telecom, CIBC, National Bank or Bank of Montreal as I’m sure many were anticipating. The only high yielding dividend stock is Rothmans, which has a tradition of raising payout and occasionally rewarding shareholders with special dividends. Not to mention the business is recession resistant. But given the portfolio’s lofty 4.69% yield, we still have the buffer to add other lower yielding stocks like Talisman, Shoppers, Research In Motion and Potash without falling short of the 4% target.

I could be tweaking this portfolio all week long, but without further ado…

Sign

*** This is just a fun post. Do not interpret this as a recommendation to buy.

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Comment Number:
1
Written by:
Back Exercise » A Diversified 4.69% Yielding Portfolio
Posted on:
January 21, 2008 at 10:51 am

[…] Here’s another interesting post I read today by Financial Jungle […]

Comment Number:
2
Written by:
FourPillars
Posted on:
January 21, 2008 at 5:30 pm

Interesting - you might want to recalculate the yield after today!!

Mike

Comment Number:
3
Written by:
dropby
Posted on:
January 21, 2008 at 7:18 pm

The yield will be even higher with today’s price. :-)

Comment Number:
4
Written by:
ThickenMyWallet
Posted on:
January 21, 2008 at 7:26 pm

Great list. Not a big fan of Thomson are you?

I am always weary of dividend yield as a defining criteria. High yield are often a function of low stock price so you are buying a bond-like instrument (albeit with greater tax efficiency).

In a perfect world, I would like to see yields of 2-2.5% with increasing dividends every year.

Comment Number:
5
Written by:
dropby
Posted on:
January 21, 2008 at 7:34 pm

As a new bee with some cash, I am doing research for a list to watch for buying opportunity. I went to check Thomson and added it to my watching list right away. Thanks a lot, ThickenMyWallet, it looks like a great company.

Comment Number:
6
Written by:
Financial Jungle Guy
Posted on:
January 21, 2008 at 7:37 pm

Thanks for the comments.

* I should’ve delayed my post by one day!

* I’m not terribly familiar with Thomson, but based on preliminary work, Bloomberg appears to be eating market share away from both Reuters and Thomson.

Bloomberg: $2.8B –> $4.7B (on $1.5B operating profits)
Reuters: $3.6B –> $2.6B (on $0.256B operating profits)
Thomson: $7.4B –> $6.6B (on $1.2B operating profits)

* A study by David Dreman reviewed that the optimal strategy is to buy higher yielding stocks, but not the HIGHEST yielding stocks. 2.5% to 5.5% in today’s depressed market sounds reasonable.

Comment Number:
7
Written by:
ThickenMyWallet
Posted on:
January 21, 2008 at 9:17 pm

I am not recommending you buy Thomson (please do your own due diligence) but it has a stranglehold on research for lawyers, doctors and accountants which Bloomberg is not in.

Financial Jungle Guy- got a response for you next week on the dangers on high dividend yield. Stay tuned!

Comment Number:
8
Written by:
Financial Jungle Guy
Posted on:
January 21, 2008 at 9:55 pm

Thomson is probably a right fit for a diversified portfolio. I ought to keep quiet until I’ve done my homework.

>>[i]”Financial Jungle Guy- got a response for you next week on the dangers on high dividend yield. Stay tuned!”[/i]

:) How about a few hints? Dividend coverage ratios? Lackluster growth profiles? Diversification?

Comment Number:
9
Written by:
DebtKid
Posted on:
January 22, 2008 at 8:35 pm

I’ve heard that Canada had some great nationalized type, high yield, yet relatively safe investments. Are those the oil sands?

Comment Number:
10
Written by:
scomac
Posted on:
January 23, 2008 at 12:28 am

Interesting exercise to build a portfolio to meet a certain yield target. Coincidentally my own taxable Cdn. stock portfolio is now yielding 4.64% and that has just happened more-or-less by accident. 6 preferreds, 4 trusts and 13 commons with yields running between 0.3%(NXY) to ~11%(BR.UN).

Comment Number:
11
Written by:
Financial Jungle Guy
Posted on:
January 23, 2008 at 2:45 am

Scomac! It’s my honour to see you visiting my jungle. Hope the place is not too messy.

Everyone, scomac is the jewel who introduced me to dividend investing back about 2 or 3 years ago. You can find more of his timeless guidance over at www.FinancialWebring.com and Forums.CanadianBusiness.com.

I smell an interview in the making. What do you say, scomac?

Comment Number:
12
Written by:
Financial Jungle Guy
Posted on:
January 23, 2008 at 2:50 am

DebtKid - Canadian Oil Sand is relatively safer than most other energy trusts, but still not guaranteed. These trusts aren’t any safer than what you can find in the States.

Comment Number:
13
Written by:
scomac
Posted on:
January 23, 2008 at 3:59 am

We can talk, Ray.

Comment Number:
14
Written by:
Contest Winner, Rate Cut, and Other Good Reads - Jan 25, 2008 | Million Dollar Journey
Posted on:
January 25, 2008 at 10:33 am

[…] Financial Jungle creates a diversified 4.69% yielding portfolio. […]

Comment Number:
15
Written by:
tvenner
Posted on:
January 25, 2008 at 7:57 pm

Are you a celebrity now Scomac? Missed some fine brews on tuesday btw.

Comment Number:
16
Written by:
Dividendgrowth
Posted on:
January 26, 2008 at 6:06 am

I am a big supporter of equally weighted portfolios. I am also a big supporter of dividends and dividend yields as well. But i agree with ThickenMyWallet that high-yield alone should not be a screening criteria. Instead I would be looking for companies that increase their dividends every year at least for the past 10 years and are yielding at least 2% as well. With my screening criteria I have constructed a portfolio based off the s&P dividend aristocrats and high-yield dividend aristocrats. It offers a yield of 3.07%, but it also offers a potential for dividend increase. Sorry to post an outside link, but the spreadsheet could be found here:
http://spreadsheets.google.com/pub?key=pOzbJBiI71k0mqLCrW3cWWw&gid=2
And my criteria is posted here
http://dividendgrowth.blogspot.com/2008/01/my-current-watchlist.html

Comment Number:
17
Written by:
Financial Jungle Guy
Posted on:
January 26, 2008 at 11:15 am

Dividendgrowth - Thanks for your comments. Just to clarify, this sample portfolio is not a result of a screen based on yield alone. All of the common stocks I outlined have above-average dividend growth, and that’s not a coincident.

For income trusts, their distributions usually don’t grow as fast as dividends, but the ones I picked have above-average growth within the trust group.

Inside a registered account, yield and growth are interchangeable; you can reinvest the distributions to buy more units, thus grow the distributions that way. Take Consumers’ Waterheater for example. Its 8.8% distribution yield is expected to grow 6% annually. Between reinvesting the 8.8% yield and the 6% growth, your overall yield is expected to appreciate 8.8%+6% = 14.6% per year. This is no different than a low 2% yielding stock growing at 12.6% per year. Both are growing at approximately the same rate.

Comment Number:
18
Written by:
telly
Posted on:
January 28, 2008 at 2:33 pm

FJ,

Thanks for following up on this (and sorry it’s taken me so long to read it & respond. I was in vacation mode :) ).

It looks like current stock prices are definitely creating an opportunity to build a high yielding portfolio. Like you, I’m taking advantage of this.

I don’t have a problem with income trusts but I do have a problem with including them in a dividend portfolio when you’re using tax efficiency as one of your selling points for a dividend portfolio. If you can throw in income trusts, why not throw in a couple of ETFs as well? Cap gains are more tax efficient than income distributions are they not? (I don’t own any income trusts outside of those in ETFs).

And then if you start adding RIM, Shoppers, etc., you might still be better off DCAing into ETFs.

Btw, I’d love to see a guest post by scomac. I always enjoy his comments at FWF and CB forums.

Comment Number:
19
Written by:
Dividendgrowth
Posted on:
January 28, 2008 at 3:31 pm

FJ, thanks for following up on the comment. Good luck in your endeavours. But I still think that equal weighting would work better for small investors like us.

Comment Number:
20
Written by:
A Diversified 4.69% Yielding Portfolio | Financial Solution News
Posted on:
January 28, 2008 at 5:17 pm

[…] post by Financial Jungle Guy Related Posts: Top 5 Reasons Why Dividend Investing Over […]

Comment Number:
21
Written by:
Financial Jungle Guy
Posted on:
January 29, 2008 at 5:26 am

telly - fair enough that income trusts’ distributions are generally taxed heavier than capital gains (except in REITs where they distribute a big chunk in ROC.)

Depending on your province and your tax-bracket, unused dividend tax credits go wasted since they don’t carry into future years. If you’re going to lose them anyway, might as well get a free ride on income trusts. Personally, I take advantage of the tax deferral inside RRSP by hiding my trusts in there.

>>”If you can throw in income trusts, why not throw in a couple of ETFs as well? Cap gains are more tax efficient than income distributions are they not? (I don’t own any income trusts outside of those in ETFs).”

Not following. Are you suggesting income trust ETFs? My gut tells me that bad trusts outweigh good trusts, so I rather hand-pick them.

>>”Btw, I’d love to see a guest post by scomac. I always enjoy his comments at FWF and CB forums.”

I meant to prepare a list of questions for scomac over the weekend, but I forgot that I had a few prior engagements. Yes, I’m eager to pick his brain very soon. He’s steady and experienced. Best of all, he’s very open about his investment strategy around newbies like us.

Comment Number:
22
Written by:
Thicken My Wallet » Blog Archive » Is Dividend Yield Over-rated?
Posted on:
January 29, 2008 at 12:52 pm

[…] the Dividend Guy Blog and Dividend4Life as good resources. Financial Jungle has also constructed a 4.69% dividend yield portfolio for informational […]