The Globe and Mail - 22.02.2020

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SATURDAY, FEBRUARY 22, 2020 | THEGLOBEANDMAIL O REPORTONBUSINESS | B13

A

t the start of the year, I pre-
dicted that most of the
companies in my model
portfolio will raise their divi-
dends in 2020.
Well, we’re off to a very good
start.
Less than two months into
2020, seven of the portfolio’s 20
companies (there are also two
exchange-traded funds) have an-
nounced dividend hikes. For
those keeping score at home, the
companies (and their percentage
dividend increases) are: BCE Inc.
(ticker symbol BCE; 5 per cent),
Brookfield Infrastructure Part-
ners LP (BIP.UN; 7 per cent),
Canadian Utilities Ltd. (CU; 3 per
cent), Manulife Financial Corp.
(MFC; 12 per cent), Restaurant
Brands International Inc. (QSR; 4
per cent), Royal Bank of Canada
(RY; 3 per cent) and TC Energy
Corp. (TRP; 8 per cent).
Dividend growth is the core of
my investing strategy. When a
company hikes its payout, it’s do-
ing two things. First, it’s putting
more money into investors’
pockets, which increases their
spending power and counters
the effects of inflation. Second –
and just as important – a divi-
dend hike signals that the com-
pany is confident about the fu-
ture. I never try to guess what
stocks will do in the short run,
but over the long run share pric-
es of companies that boost their
dividends tend to rise, providing
capital gains on top of growing
income.
My model Yield Hog Dividend
Growth Portfolio (tgam.ca/divi-
dendportfolio) is proof of that.

Through Feb. 20, the portfolio

has posted a total return – from

capital growth and dividends – of

about 36 per cent since inception

on Oct. 1, 2017. That tops the total

return of about 23.3 per cent for

the S&P/TSX Composite Index

over the same period. The model

portfolio, which started with

$100,000 of virtual funds, is now

worth $135,982 and is generating

projected annualized income

(based on current dividend

rates) of $5,308, up 29.7 per cent

since inception.

Reinvesting dividends is an-

other key component of my in-

vesting strategy, and today I’ll be

deploying most of the more than

$2,000 in cash that has accumu-

lated recently.

Finding bargains in the stock

market has become a challenge

after the recent run-up in share

prices. As stock prices have

climbed, dividend yields have

dropped, which means every

new dollar invested generates

less income than it used to. I

don’t see a lot of compelling val-

ue in the 22 securities I already

hold in the model portfolio, so

I’ve decided to go “off the board”

and add 65 units of a security I

believe is still attractively priced

• namely SmartCentres Real Es-
  tate Investment Trust (SRU.UN).
  SmartCentres REIT (which I al-
  so own personally) is best known
  for its 170 retail shopping centres,
  most of which are anchored by a
  Walmart, a rock-solid tenant that
  accounts for about 25 per cent of
  the REIT’s revenue. Walmart’s
  strength notwithstanding,
  SmartCentres’ focus on the retail
  sector – and its exposure to
  chains such as Payless Shoes and
  Bombay/Bowring that have gone
  under in recent years – is a big
  reason the units have struggled
  even as other types of REITs have
  been surging.
  That’s the bad news. The good
  news is that SmartCentres’ occu-
  pancy rate is still strong at 98.1
  per cent. What’s more, Smart-
  Centres is transforming itself into
  more than a retail REIT; it has an
  extensive pipeline of develop-
  ment projects that includes con-
  do and apartment towers, offices,

self-storage facilities and retire-

ment residences. Some of these

projects are expected to start

contributing meaningfully to the

REIT’s bottom line in 2020-21. In

the meantime, investors get

“paid to wait” with an attractive

yield of 5.9 per cent.

Another plus is SmartCentres’

valuation. At a time when many

other REITs trade at a premium

to their net asset value (NAV is

essentially the market value of

REIT’s properties minus debt),

SmartCentres trades about 5 per

cent to 7 per cent below analysts’

NAV estimates.

Analysts are generally favour-

able on SmartCentres, with four

buy ratings, four holds and no

sells, according to Refinitiv. The

average price target is $34.31. The

units closed Friday at $31.48 on

the Toronto Stock Exchange.

“With a defensively positioned

Walmart-anchored portfolio,

near-term AFFO [adjusted funds

from operations] and NAV

growth set to improve, a substan-

tial long-term value-creation op-

portunity and discounted valua-

tion, we continue to see a decent

entry point,” RBC Dominion Se-

curities analyst Pammi Bir said in

a recent note. He reiterated an

“outperform” rating and $36

price target on the units.

In keeping with my dividend

growth approach, I also like the

fact that SmartCentres has been

raising its distribution annually

for the past six years – a trend I

expect will continue. The distri-

bution is also well-covered,

thanks to a payout ratio that

analysts estimate at about 80 per

cent to 85 per cent of projected

AFFO for 2020. (AFFO is a cash-

flow measure that includes

maintenance capital spending

and is considered more conser-

vative than funds from oper-

ations, or FFO.)

I’m not expecting a quick re-

turn from SmartCentres. But

over the long run, I’m confident

it will deliver a nice combination

of distribution increases and cap-

ital growth as its pipeline of new

projects start churning out cash.

Special to The Globe and Mail

Mydividendportfolioissurging–nowit’stimetoshop

Sevenof20companies

havehikedpayoutsthis

year,butit’shardtofind

bargainsinahotmarket

ISTOCK

JOHN
HEINZL

OPINION

YIELDHOG