September marked a milestone. It was the first time the markets finished in the green since before the pandemic. It’s certainly shaping up to be a solid year for the markets overall and for the companies featured here at Premium. With recent economic data coming out of the United States signalling that the job market is still relatively strong, a soft landing is still on the table.
In that ends up being the situation, many pundits believe that stocks still have room to run.
As always, short-term movements really shouldn’t impact our decisions as long-term investors. However, it’s important to appreciate when the markets have gone on such a run, as it can sometimes help mentally when they inevitably pull back.
In this week’s newsletter, I’m going to be going over my portfolio moves along with the updates of our High-Yielding model portfolio.
And before you think, “I’m not all that interested in the high-yielding portfolio,” it has put up nearly 17% annualized returns since its inception on Jan 1, 2023.
There are lots of moves inside this update, including some popular Canadian stocks, so it’s certainly worth a read. Of note, the portfolio documents on the website are updated, so you can view it entirely.
First things first, let’s dive into my moves.
My portfolio moves
I made the final addition to Value Call Telus (TSE:T) inside my portfolio. As I had mentioned, I wanted to get the stock near a 3% total allocation to take advantage of what I believe to be discounted valuations. When (if) my thesis rings true and the stock recovers in value, I will look to sell a portion (or potentially all) of my position in Telus.
Many members have questioned Telus’s status as a Foundational Stock after my using this strategy. I will say this: Telus is being heavily considered for removal from the Foundational Stocks for 2025. However, if the company still remains discounted at the start of the year, which I believe it will be as I don’t expect a 3-4 month recovery, but more so multiple years, the company would simply be removed from the Foundational Stocks and added to the Dividend Bull List.
My second addition was Boyd Group Services (TSE:BYD). If you look to our last newsletter, I explain in-depth why I’ve been adding the stock. Now that my Telus position is full, Boyd will be the next position I will start aggressively adding.
And finally, I added a new position to recent Bull List stock WSP Global (TSE:WSP). I won’t explain why, as most of my commentary is right inside our report on WSP, which I’ll link to here.
One thing this illustrates is that I’m not afraid to put my money where my mouth is. Over the years, I’ve bought over 90% of the highlights here at Premium, and I continue to hold them through the ups and downs with members.
Our High-Yielding Model Portfolio
Despite being a high-yielding model, this portfolio has performed exceptionally well. Over the last 20 months or so, it has outperformed its benchmark, which is a 65/35 TSX/S&P 500 benchmark, by around 7.7%~.
This strong performance includes a 5.4%~ yield, so those who have modelled after this portfolio are indeed getting the best of both worlds.
The good
The BMO High Yield Corporate Bond ETF (TSE:ZJK)
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For those who don’t know, bonds are inversely correlated to interest rates. This means when rates go down, bond prices go up. We’re seeing this with ZJK, as it has posted total returns of 21.29% since the start of 2023. Yes, the markets have returned more than this, but we do have to understand this is a fixed-income fund, not an equity fund. We shouldn’t expect it to provide the same level of returns.
When we factor in risk-adjusted returns, however, the returns from ZJK become a lot more equally attractive to the S&P 500.
Another element of ZJK is that it is a US corporate bond ETF. The Fed has only just started to lower rates and is behind the ball relative to the Bank of Canada in that regard. If rates continue to go down, ZJK will likely continue to grow in terms of capital appreciation.
Because of this, we’re going to tick our exposure up to this fund from 10% to 13%.
Chemtrade Logistics (TSE:CHE.UN)
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Chemtrade Logistics was a controversial pick inside of this portfolio when it came out. I recall many members coming to me and asking, “What would be a good replacement for Chemtrade in this portfolio?”
And to an extent, I don’t blame them. The company hadn’t performed all that well in the past, and plenty of investors decide what stocks they want to own based on previous returns.
However, the pandemic had a unique impact on Chemtrade, not only temporarily lowering the demand for its products but also causing large-scale supply disruptions that caused the company to report numerous years of losses.
Fast forward to now, and the company has gone from losing $1.10 per share in late 2022 to earning $0.88 in 2024. As a result, it’s up over 55% over the last year.
I see multiple tailwinds with Chemtrade right now.
For one, lower interest expenses should boost earnings as rates continue to come down. Secondly, higher-yielding options will ultimately become more attractive after years of investors hoarding money in 5%+ fixed-income investments. Finally, a pickup in economic and industrial activity in the US economy, which is where the company derives most of its revenue.
Alaris Equity Partners (TSE:AD.UN)
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Alaris has been a Bull List stock here at Premium for a few years now. We identified the company as one of the more attractive “asset managers” in Canada. I put asset managers in quotations because although the company is classified this way, what it does is provide capital to businesses in exchange for distributions from the companies.
Although it is a Canadian-listed company, most of its partners are located in the United States. The bulk of the company’s exposure is going to be on the medium-sized business end. Although they are not as prone to rate fluctuations as small businesses, they still benefit quite a bit from rate declines. This is exactly why Alaris is doing so well as of late. The fed has decided to cut rates and will likely continue cutting them moving forward.
In my opinion, the company provides a mid-7% yield with some reasonable capital appreciation moving forward. A share price above $20~ would not surprise me if the United States continues its pace of rate declines into 2025.
The bad
There have only been two stocks in this portfolio that are in the red over the last year, and surprisingly, only 3 haven’t provided double-digit returns over the last year. I’m primarily going to speak on two Canadian options here.
BCE (TSE:BCE)
If you’ve followed my commentary for the last while, I’ve been quite the critic of BCE. I was willing to let the issues slide inside this portfolio because of its higher-yielding, blue-chip nature. However, it’s gotten to the point where I really don’t like the company much at all and the decisions it’s been making over the last while.
The company has mismanaged the balance sheet over the years, wracking up debt. As a result, it is in a position where it must sell off non-core assets in an attempt to shore up the balance sheet. One of those recent asset sales is what I believe to be their best non-core asset in Maple Leaf Sports and Entertainment.
Although the company is a high-yielding stock, at this point in time, the dividend coverage is so weak that I believe the high-yield is destructive to shareholders and not productive. As mentioned, I had wanted to give BCE some time to sort out its cash flow issues inside of this portfolio, but the results through 2024 are not that good.
For this reason, we’ll be selling the position inside of the portfolio and putting the proceeds toward Telus, another high-yielding telecom and one I feel has the chance to do well over the next few years.
Parkland Fuels (TSE:PKI)
Parkland’s spat with one of its major shareholders, Simpson Oil, highlights how important a solid and stable management team is when buying stocks.
Parkland was a former Bull List stock and a stock I formerly owned. I sold the company off in the mid-$40 range after it had tried to pull a fast one on Simpson Oil and push its annual meeting to a timeframe where Simpson would not have had voting rights to elect some new board members.
I provided commentary on the company’s position inside of this portfolio as well, stating that I’d be willing to hold onto it inside of this higher-yielding portfolio for the more attractive dividend.
However, at this point, I’m not sure management is going to get their act together, and I do feel it is likely best to move on from the company.
The replacement? We’ll be routing the proceeds entirely into Tourmaline Oil and Canadian Natural Resources, two energy companies that are dedicating 100% of their free cash flows back to investors via special dividends and buybacks.
For a high-yielding portfolio, this is music to someone’s ears.
Additional changes
Outside of these two changes:
- The sale of BCE and replacement with Telus
- The sale of Parkland Fuels and the proceeds added to Tourmaline and Canadian Natural
I’d like to make a few other positions and changes within the portfolio. Let’s dig into them right now.
The sale of A&W Royalty
This one is pretty routine. I’m selling the company inside of this portfolio as it is going to be merging into the new corporation soon. I’ll revisit the new corp when it trades. However, I do not expect it to provide a yield as attractive as the royalty.
The sale of Emera
It is not that I have grown to like Emera all that much. It’s just I have grown to like Fortis so much more. Yes, I’m giving up a bit of yield by selling Emera and adding to Fortis. However, I’m mildly concerned about the company’s dividend coverage. I don’t believe it is in a situation where it will be cutting anytime soon. However, tight payout ratios may end up reducing overall growth.
In addition, Fortis’s capital plan is a bit more expansive than Emera’s, and I believe it will fuel better growth for Fortis in the future.
I’m going to hold onto Bank of Montreal (TSE:BMO)
I felt the need to mention this because a lot of people may be confused as to why I sold Bank of Montreal in my own portfolio and why it was removed from the Bull List.
This is primarily because I acknowledge this model portfolio is, at least to an extent, based on providing higher yields. Do I believe Bank of Montreal will outperform Royal Bank and National Bank on a total return basis moving forward? I do not, so I sold it off and put the proceeds into National and Royal.
However, at a yield north of 5%, I believe that BMO provides a nice balance to those who want to hold a blue-chip equity with a higher income stream that may not be dead set on achieving the highest total returns possible.
This is exactly why it’s in the portfolio. If you find you want to hold a higher quality bank, just consider National or Royal instead. Remember, this is a model portfolio, not a copy portfolio.
