In this week’s email, we’ll review a comprehensive update of 2 of our model portfolios. Typically we do all 3 in a single email. However, there is way too much commentary in this weeks newsletter to cover all 3, so we’ll split them up.
Keep in mind, our entire commentary plus the in-depth portfolio overviews are all available on our Model Portfolio tabs on the website. You can visit them there.
The Dividend Growth and High Yield models had strong years, outperforming their blended S&P500/TSX benchmarks.
The All-Canadian equal-weight portfolio struggled primarily due to its exposure to rate-sensitive companies. However, we’ll speak more on that next week.
Let’s jump right into it.
Want a quick overview of the transactions? Here they are:
- We sold our position in Texas Instruments, trimmed our position in Abbvie, and bought UnitedHealth Group in the dividend growth model
- We trimmed our position in Bestbuy from 5%~ to 3% and bought Tourmaline Oil in the high-yielding portfolio.
Our Dividend Growth Model Portfolio
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The dividend growth model is currently sitting on returns just shy of 17%, while its benchmark, a 60/40 blend of the TSX & S&P 500, has returned 9%.
It has been a great start for the model, which was created at the start of 2023 due to the high d
emand from members to have more income-focused portfolios.
Let’s quickly go over some stocks that moved the needle in both directions for the portfolio.
The Good
9 stocks inside this portfolio returned over 20% in 2023, a little over a third of the entire portfolio.
However, the major standouts were, surprisingly, mostly Canadian stocks.
Although Microsoft (MSFT) was no slouch at 1-year returns just shy of 65%, it was Equitable Bank (TSE:EQB), Constellation Software (TSE:CSU), and Stella Jones (TSE:SJ) that led the pack with returns of 61%, 59%, and 74%, respectively.
Stella Jones
Stella Jones is a former Bull List stock and an exceptional performer over the last year or so. Although we removed the stock from the Bull List and trimmed back a bit of our position in the $70 range, the stock just seems to be finding ways to keep increasing.
Although we’re still holding Stella in the portfolio, the value gap has undoubtedly closed on the company, and we’re fairly comfortable sticking to our current position size of around 3%.
Equitable Bank
Equitable Bank, a current Bull List stock, is one that we believe traded in deep value territory for a long time. The company is one of the strongest dividend growth stocks in the country, routinely raising the dividend on a quarterly basis on the back of strong earnings growth.
Although we’d have no problems adding at these current levels, there is no doubt that the value gap has also closed here. From an earnings standpoint, the bank is still relatively cheap.
However, on a price-to-book basis, which is a popular valuation metric used among investors buying financial institutions, Equitable Bank is now trading at a 27% premium to its historical average price-to-book multiple. It is trading at a higher book multiple than many of the major institutions here in Canada.
This is likely a combination of Equitable’s outsized growth relative to the major banks and the market starting to realize that its loan book is not as risky as perceived.
On the mortgage front, Equitable is seen as a B-grade lender, one that often accepts clients that the big banks send away. While this may be true to an extent, a large portion of Equitable Bank’s mortgage portfolio is insured (47%) due to its customers having less to put down on a home. In the end, this is beneficial for the bank.
Constellation Software
Constellation Software, a Canadian Foundational Stock, continues to defy investor expectations. It is putting up exceptional returns and firmly establishing itself as one of the best technology stocks in Canada and North America.
Many members ask us if Constellation is worth buying at all-time highs. We get it; there is a need among many investors to feel as if they’re getting a bargain when they buy a stock. However, investors in the past have realized some significant returns in buying Constellation at all-time-high valuations.
When the company traded at all-time high valuations in 2019, it has returned 100% since.
When the company traded at all-time high valuations in 2016, it has returned 554% since.
And finally, when it traded at all-time high valuations in 2014, it returned 1200% since.
Is it a guarantee that it will do the same moving forward? Of course not. Nothing is guaranteed when it comes to the markets. However, we’ve stated this numerous times before: investors should focus on business fundamentals first and valuation after, not the reverse. Even at all-time highs, most investors would find an outstanding company in Constellation.
The bad
There isn’t much to talk about on the bad front in this portfolio. Outside of the typical rate-sensitive stocks like Telus, which are in a bit of a cyclical slump right now, the only poor performers that stand out are Franco Nevada (TSE:FNV), which is simply caught up in a rough situation with one of its streaming mines (which you can view more on in our Foundational Stock report located here) and Jamieson Wellness, which was having a horrible 2023 due to fears of financing costs and slowing growth.
However, Jamieson ended the year gaining more than 35% off lows, and the summer of 2023 proved to be nothing but a buying opportunity for the small-cap dividend grower.
We still hold both positions confidently and won’t be making any changes.
The changes
We’ve decided to move on from a semiconductor play we added into the portfolio in Texas Instruments and instead place that money into our latest U.S. Foundational Stock addition, UnitedHealth.
Growth seems to be somewhat lagging at Texas Instruments, as revenue and earnings slip and dividend growth comes in lower and lower. In hindsight, the better semiconductor play would have been Broadcom (AVGO), which we hold in the high-yield portfolio; however, at the time, we felt Texas Instruments would have been able to move the needle a bit more.
This is not to say that we view Texas Instruments as a bad company. We’re shifting the capital to a company we know has a wider moat and more attractive valuations.
To get our position to 4%~ of the total portfolio, we’ll also trim a small amount off our other healthcare play in this portfolio, Abbvie (ABBV). This is nothing against Abbvie, it is more to get United as an established core holding in the portfolio.
You can head to the website to view the complete reports and data on this portfolio here.
Our high yielding portfolio
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Despite being full of slower-growing, higher-yielding stocks, the high-yield portfolio performed even better than the dividend growth portfolio when we consider its benchmark.
Because this is more yield-focused, the benchmark is a combination of VDY, a Vanguard Canadian High Yielding ETF, and SCHD, a popular U.S. dividend ETF. This benchmark returned 6.15%, whereas the High Yielding Portfolio returned just shy of 16%.
Let’s dig into it.
The good
There were three key standouts in this portfolio over the course of 2023. The first would be Canadian stock Parkland Fuels (TSE:PKI), which found its way into this high-yielding portfolio due to a discounted price which raised its yield at the start of the year.
The second would be the Harvest Tech Achievers ETF (TSE:HTA), a high-yielding covered call ETF we added to the portfolio that returned over 45%, which is more than the NASDAQ.
And finally, Broadcom (AVGO), our no-longer high-yielding semiconductor play witnessed a near doubling in 2023. As a result, its yield has dipped to sub-2%. Let’s dig a little deeper
Parkland Fuels
Parkland had been dragged down in 2022 for multiple reasons. However, the main issues were situated around struggling turnaround post-pandemic and higher than average debt levels during a rising rate environment.
We stuck with the company despite some pretty harsh circumstances, as it had proven in the past that it could execute in almost all situations. I (Dan) have owned Parkland Fuels for the better part of 7 years, and I was fairly confident this was a short-term blip for the company.
It has posted an exceptional first 3 quarters of 2023, topping earning expectations in every quarter, improving margins on nearly every level, and growing free cash flows.
Despite this, the company remains attractively valued. Although its yield isn’t where it once was during its drawdown, it is still above 3%. We’re happy to continue holding a full position in this company.
Harvest Tech Achievers
This is a high-yielding portfolio. Because of this, we figured it would mostly be utilized by those currently looking to generate income for retirement and thus want it in CAD. For this reason, we tried to minimize the total USD holdings we had in the portfolio.
The Harvest Tech Achievers ETF was a great way to get exposure to the booming U.S. tech industry, generate income, and keep the currency in CAD.
Surprisingly, despite running a covered call strategy, this fund outperformed the NASDAQ itself.
The main reason for this is its high exposure to semiconductor producers. Remember, this fund aims to pay out income, but not necessarily in the form of a dividend. Its distribution can be made up of dividends, capital gains, return of capital, etc.
So, if this fund yields so high yet doesn’t have an abundance of high-yielding stocks, this is exactly why. It will actively manage the portfolio and capture a wide variety of returns for its shareholders.
It will be interesting to see where it can keep up these returns in 2024. Regardless, this fund has excelled for many years, and we’re happy to keep a full position.
Broadcom
Semiconductors exploded in 2023; there is no question about that. However, although there is some degree of speculation within semiconductor prices, Broadcom was cheap enough when we added it that a doubling in price doesn’t really make it even remotely overvalued.
At the time of writing this, it is trading at less than 20 times its expected earnings. With expected double-digit growth on the horizon for the next few years, we have no problem maintaining the position we have inside the portfolio.
No, this may not be a powerhouse grower like NVIDIA, but in our opinion it is not priced to perfect, unlike NVIDIA.
The bad
There isn’t much not to like in this portfolio from the last year. So, we’ll instead focus on the lone stock in this portfolio that lost double digits, that being Best Buy (BBY)
It is not all that surprising to see the retailer struggle in 2023. Its entire product line is discretionary items, items that people tend to scale back on when times get tough.
Despite the significant decline in discretionary spending, the company is only witnessing a low double-digit pullback when it comes to revenue and net income.
If we start to see some rate relief in 2024 or 2025, we’re confident Best Buy will rebound. However, we could certainly see some short-term weakness here, so we’re going to scale the company back from a typical 5%~ position to 3%~.
The changes
As mentioned, we’ve decided to trim our position back in Best Buy from 5%~ to 3%. With the capital from this sale, we will add a position to Tourmaline Oil (TSE:TOU), a Dividend Bull List stock.
Natural gas pressures have caused this one to dip in price. However, we feel it is trading at a discount at this time.
You may be wondering why we are adding a company with a 2% dividend yield to the high-yielding model. The answer is simple. Tourmaline issues special dividends, often every quarter, and should be able to continue doing so even in this tough environment.
As a result, its actual yield should end up much higher than the 2% it currently shows. On a trailing twelve-month basis, the company issued over $6.50 in dividends.
In this new pricing environment, it will certainly not be able to pay that much out in 2024. But it should still be able to provide investors with a much higher yield than posted.
In our opinion, Tourmaline is one of the best natural gas producers on the planet, one that can generate positive cash flows even in challenging pricing environments. In return, Tourmaline has stated it will return 100% of its free cash flows to investors, which are simply cash flows after capital expenditures plus any additional acquisition activity.
