Late last year, I started up a dividend income portfolio to help supplement my reduced income for this year. In an attempt to see how well I am building out my income portfolio, I’ve found three mutual funds that I will be comparing my portfolio to:
- TD Monthly Income Fund – I (TDB622)
- TD Diversified Monthly Income Fund – I (TDB159)
- RBC Monthly Income Fund – Series A (RBF448)
The three have been picked randomly – mainly as the first three I could find daily pricing and dividend income on. It’ll provide a good benchmark for whether or not I can just replace my entire income portfolio with a mutual fund. Note, this data is compiled by referencing historical prices and dividends from Yahoo! Finance and I reserve the right to claim I may have experienced a brief moment of dyslexia and copied in different values (should one of the asset management companies come after me claiming misrepresentation of data).
So, here’s how the first 7 months have turned out:
|Starting Book Value:||$110,000|
|Current Market Value:||$116,018||$117,768||$119,685||$115,052|
|Annualized RoR (less dividends):||9.55%||12.40%||15.55%||8.00%|
|Received Dividends (Lifetime):||$3,349||$1,217||$1,062||$2,472|
|Annualized RoR (with dividends):||15.02%||14.39%||17.31%||12.00%|
We’ve been quite lucky – as the market as rebounded from its slight dip earlier this year, so has the income portfolio. I would be happy to be getting these annualized returns but it’s a little too early to be looking closely into those – with the portfolio having only been in existence for 7 months, the calculation extrapolates the positive return to 12 months. It’ll take a year or two (and some additional stocks added to the portfolio) before that number becomes meaningful. In any event, comparing performance against the three funds (in which RBC seems to be lagging TD – but we’ve only been at this for 7 months); the TD funds have me upped in terms of portfolio value appreciation. Both TD funds were able to get a couple of percentages higher.
However, I’m surprised that our income portfolio killed the three funds in terms of dividends received and taking dividends into account, our rate of return puts in between the two TD funds. For our second update, I’ll double-check the dividends – I could be potentially missing some of the fund dividends as their capital gains are paid on an annual basis which Yahoo may not capture.
Why dividend payout ratio matters
TransAlta Corp (TA) is my lone black mark on the portfolio so far and probably why the portfolio is lagging the funds in terms of market value. We were first woo-ed by the company’s 8% dividend ($0.29*4 / $14.70 purchase price). Well, the company’s dividend payout ratio (annual dividend over earnings) was over 100 at the time signalling a likely reduction in the dividend if earnings failed to rise in the future. Well, that indeed happened as the company cut the dividend to 18 cents a quarter and the subsequent 10% drop in share price. However, even at 18 cents a quarter, that still works out to be a nice 4.9% yield at our purchase price. The company looks to be going through some restructuring and efforts to right itself up, so we’ll keep a close eye to see if even this lowered dividend rate is sustainable.
Crossing my fingers for good news
We added Extendicare (EXE) earlier this year on a possible breakup of their US and Canadian operations – hopefully unlocking some value in the US operations. As of the last earnings call, the company announced that they were in negotiations with 1 party pending a OIG investigation. While the OIG investigation sounds serious (involving the Department of Justice), it seems like the investigation just pertains to addressing proper oversight and governance. Anyways, the key quote from the earnings call:
“If the investigations can be resolved in an acceptable manner to us and the perspective buyer, we expect that the separation of the businesses will be affected by way of a sale of the U.S. business. If not, we will nevertheless proceed to separate the Canadian and U.S. businesses, utilizing one of several alternative techniques that are being considered and analyzed by the strategic committee.”
The company gave an approximate timeline of the end of June (which lands right about now!). How much do I think the US operations will add? Well, there’s plenty of bottoms up analysis on a per bed value in discussion forums but I’ll reference the Motley Fool article that got me interested in the stock. While the article is aiming high at $10-14 for the US operations, even anything close to $3-5 would still make this investor happy. In the meantime, we’ll continue to collect a nice sustainable 6.7% dividend till we hear more.