John Heinzl was the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his new model dividend growth portfolio here.
Goodbye, Strategy Lab. Hello, Yield Hog dividend growth portfolio.
In case you missed the announcement, The Globe and Mail's Strategy Lab series has come to a close after five years.
I'm pleased to say that my Strategy Lab model dividend portfolio – which focused on blue-chip stocks that raise their dividends regularly – posted an annualized return of 11.6 per cent, beating the S&P/TSX composite index's annualized return of 7.2 per cent over the same period. (Both figures are total returns that include capital gains and dividends).
I was a big believer in dividend investing even before Strategy Lab started in September, 2012. Now, I'm even more convinced that it's one of the surest ways for do-it-yourself investors to build wealth over the long run – without taking excessive risk.
That's why I'm willing to stick my neck out again.
Next week, in response to popular demand, I'll be launching the Yield Hog dividend growth portfolio. It will be similar to my Strategy Lab portfolio in that it will consist largely of blue-chip stocks that raise their dividends regularly. But there will be some key differences this time around. The initial portfolio value will be larger – $100,000 instead of $50,000 – and the number of stocks will be greater than the 12 securities I was limited to in Strategy Lab. I always said that a dozen securities doesn't provide proper diversification and the new portfolio will address that shortcoming.
I'll still be using virtual dollars – The Globe didn't have a hundred grand lying around, unfortunately – but it will be more than a theoretical exercise. I use the same dividend growth strategy with my personal investments and I expect that there will be a lot of overlap between the stocks I own in real life and the ones I hold in the Yield Hog dividend growth portfolio. So, in a sense, I'll be putting my own money where my mouth is.
I'll be honest, though: As much as I believe in dividend growth investing, I wouldn't be surprised if the next five years aren't quite as profitable as the previous five.
One reason is interest rates. After many years of falling bond yields, borrowing costs are once again on the rise. The Bank of Canada has hiked interest rates twice in recent months and there are almost certainly more increases to come. Rising rates can put pressure on dividend stock valuations and also increase costs for utilities, pipelines and other companies that borrow money. So, instead of providing a tailwind, interest rates have turned into a headwind.
Another factor is the Canadian dollar. When Strategy Lab launched back in 2012, the Canadian dollar was trading for more than $1 (U.S.). When the loonie tumbled, the value of my U.S. dividend stocks rose significantly in Canadian dollars. Now that the loonie is trading at about 81 cents, however, I don't expect a repeat of that currency windfall. Worse, if the loonie continues to strengthen, the value of U.S. assets will fall in Canadian dollars.
Now that I've sufficiently lowered everyone's expectations, I'll say a few words about the purpose of the new portfolio. The main goal is to illustrate a real-time example of dividend growth investing in action, not to provide a template for people to copy exactly. There are dozens of great dividend growth stocks out there and I can't possibly include all of them in the portfolio. I will, however, continue to write about a wide variety of dividend stocks – many of which are worthy investments even if they aren't included in the portfolio.
I also want to stress that, just because I own a stock in the portfolio doesn't mean it's a slam dunk. There are risks with every investment, and I always encourage people to do their own due diligence before purchasing any security. So consider the portfolio a starting point for further research – not the last word on what stocks you should own.
With those caveats in mind, I hope you enjoy following along with the Yield Hog dividend growth portfolio. My blue-chip picks aren't going to double or triple overnight, but they should – barring some unforeseen event – generate modest capital gains and an income that grows steadily. My Strategy Lab portfolio's annual income soared 80 per cent over five years – helped along by frequent dividend increases and dividend reinvestments – and if my Yield Hog dividend growth portfolio comes even close to that, I'll be a happy investor.
Globe Unlimited subscribers can read more on the Strategy Lab series at tgam.ca/strategy-lab.
John Heinzl