Since we launched Dividend Investing – How To Build A Never Ending Cash Distributor, we have received several emails from readers and new subscribers. I’m trying to answer to as many as possible individually. Sometimes, I get enough stuff that I decide to write a full article. This is the case today with the analysis of a high yield dividend portfolio from a reader. This Canadian investor is making 8% with his portfolio, let’s take a closer look:
The High Yield Dividend Portfolio Paying 8%:
Stock Sector Ticker Market Price (as of June 27th) Dividend Yield
Husky Energy Energy HSE Canadian $26.61 4.60%
Power Corp Finacial POW Canadian $26.10 4.40%
AT&T Telecom T US $30.76 5.70%
Data Group Industrial DGI.UN Canadian $5.63 11.40%
Alta Gas Energy ALA Canadian $25.49 5.20%
Atlantic Power Corp Utilities AT US $15.24 7.30%
Financial 15 Split Financial FTN Canadian $8.58 17.70%
Parkland Merchandising & Lodging PKI Canadian $12.08 8.50%
Whiterock REIT Real Estate WRK.UN Canadian $13.27 8.40%
Average Div 8.13%
Now, making an average of 8% dividend yield is awesome, but there is no free lunch in finance. Do you really think that you can sit comfortably on the couch, watching tv while counting your 8% dividend checks? Not too fast….
The High Yield Dividend 8% Portfolio Analysis:
Out of this very high yield dividend portfolio, I see 2 relatively stable stocks: AT&T and Power Corp. As I don’t want to go through each stock to analyze them one by one (this would take me a whole month of posts), I wanted to take a look at the portfolio globally.
I didn’t get the detail of how many shares were purchased in each of these stocks so I will assume that they are all equal. The first comment I have about this portfolio is that it is typically Canadian ;-). But it’s not only because there are 7 out of 9 stocks that are Canadian (and Atlantic Power also trades on the TSX so I guess that this one is in Canadian dollars too. The portfolio is also overweight in energy (Husky Energy, Alta Gas and Parkland which transports fuel) and financials (Power Corp and financial 15 split) which represent the Canadian market pretty well. On top of that, we finish the portfolio with a Canadian REIT which is a pretty good idea since they are very tax efficient (Canadian REITs are the only income trust survivors).
When I was jumping from one financial statement to another, I noticed that some stocks were showing shaky financials. This is not the typical large cap dividend portfolio paying a steadily increasing dividend according to steady increasing earnings. In fact, when I did the Husky Energy Analysis a few months ago, I knew I was picking a stock with “its good and not so good days”. The energy sector is highly volatile on the Canadian Market and HSE was definitely not a smooth stock to buy. And from what I see, there are some other rock’n roll stocks around!
Some of these stocks share 3 common points:
#1 Their earnings are not necessarily stable (there are ups and down)
#2 They are showing a 1yr, 3yr stock up trends
#3 They are paying some pretty high dividends!
However, some of these stocks show a negative 5 year dividend growth. When you combine a high payout ratio, a high dividend yield and dividend cuts, I’d say that you jumped in the high dividend yield limousine without looking at who is the chauffeur!
Overall, if the energy sector goes well (as I’m sure that the financials in Canada will!), this portfolio should be able to pay some pretty good dividends for a while and should not see its capital drop by too much. However, considering some inconsistency in profits and the dividend cuts, I would be careful with such a portfolio if we dip into another recession. Since the whole economy is still a bit shaky at the moment, I would not necessarily jump on this high yield dividend portfolio right away. After all, there is a reason why it is making a 8% dividend payout!
Disclaimer: I hold HSE,
Good observations. I don’t fully discount US stocks that have cut dividends, especially if I like the business and think there is both capital safety and some long term upside on the dividends. DEO is my most recent example of tipping my toe into the pool. About half a percent investment. I also like that the US dollar is now at a discount, I worry less about needing to hedge. I try an put my US holdings in RSP/RIF to offset loss of the dividend tax credit, and also then no foreign tax withheld.
I haven’t looked into your holdings but I would be a bit leery of the two highest yielding stocks.
I WOULD APPRECIATE YOUR COMMENTS RE. B D C(BUSINESS DEVELOPMENT COMPANIES) DIVIDENDS SEEM HIGH AND EARNINGS ON SOME APPEAR GOOD—ALSO IF YOU USE LEVERAGE ON STOCK LIKE ANALY MANAGEMENT PAYING AROUND 14% AND LET INTEREST BE PAID OUT OF DIVIDENDS–AM I MISSING SOMETHING?