The Greater Income Model ETF Portfolio.

The goal of this portfolio is provide a nice combination of potential capital appreciation in concert with some very generous income. The capital appreciation and (potential of) increasing income will be provided by the Canadian and US High Dividend index funds. The real estate component will hopefully deliver on the capital appreciation and income sides of the ledger.

Here’s the suggested asset allocation for a Canadian-focused income portfolio. One can certainly add on and layer in other assets such as more US, some International and more exotic income ETFs.

GreaterIncomePortfolioHeader

Now keep in mind that I always suggest that investors do not fall into the income trap. Portfolio income is mesmerizing and it can be addictive for many investors. It should not be our sole focus. When we are in the accumulation stage (building up those longer term retirement assets) the goal is to make the most money, period. When we reach that retirement stage the most monies will buy or enable you to create the most retirement income. The accumulation stage is about complete total return – capital gains + portfolio income.

If you are in the accumulation stage you might consider (and you’d likely be better off with) a more growth oriented portfolio such as The Greater Growth Portfolio. Of course, always know and invest within your risk tolerance level.

That said, I understand the allure of portfolio income. Many investors will go this route with a focus on income. And portfolio income can be a nice distraction that enables an investor to focus on the longer term. So here you have it an income based Model ETF Portfolio. But once again, I’ve tried to find that balance between some dividend-growth-based capital appreciation, income and risk. An investor can certainly create a much higher income portfolio, but the risks would likely be greatly exaggerated.

We should remember the wonderful expression.

More money has been lost reaching for yield than at the point of a gun.”

– Raymond DeVoe Jr.

When it comes to income we have to control our enthusiasm. Don’t reach to high.

Dividend Growth at the core. 

The portfolio is focused around 40% in the Canadian and US MSCI High Dividend Yield ETFs, XDIV and XDU. An investor may chose to add the International developed markets fund as well. These are the same indices that are replicated in the Tangerine Dividend Portfolio. For more on those indices please have a read of Canadian Robo Advisors: The Tangerine Big Juicy Dividend Edition.

The core message or main takeaway from that article is that those MSCI indices have beat the broader market (parent indices) in Canada, US and International. As always, and for my many friends in compliance – past performance does not guarantee future returns. 

The current dividend yield for the Canadian XDIV is quite juicy at near 5%. That’s good news. The Canadian higher dividend universe has certainly been beat up for the last year or more thanks to the fear of rising interest rates. You would purchase a very decent initial yield with the potential of annual dividend growth in the range of 6-8%.

Here are the current top ten holdings as of December 2018.

MSCI Canadian Holdings

The US MSCI XDU does not offer a very generous yield, it is the portfolio outlier. But this is what qualifies in today’s environment for a US generous dividend with a quality label. The MSCI index does include a quality screen searching for greater financial health and dividend durability.

Here are the top 10 US holdings. The current yield is just above 2.5%.

MSCI US Holdings

As always the US market with deliver on the sector diversification that is missing from the Canadian market. There are ample holdings in the Consumer, Healthcare, Technology and Industrial sectors and more.

REITs (real estate investment trusts) can be a wonderful source of income and total returns. In fact iShares XRE has beat the broader Canadian stock markets from inception. REITs are mandated to payout a significant portfolio of their cash flows to investors. The current yield for XRE is 5.0%.

Here are the top 10 holdings.

XRE Top Holdings

Bridging the gap between equities and bonds is the preferred share market. Of course a preferred share is a stock that delivers dividend income that is greater than the common stock dividends. Here is an overview of pref shares from Boomer and Echo, The Scoop on Preferred Shares.

The current yield for CPD is 4.9%.

For bond exposure you might consider iShares Corporate Hybrid ETF XHB. This is not a traditional high yield bond ETF; it’s more of a blend of investment grade corporate bonds and some more traditional higher yielding non-investment grade corporate bonds.

The current yield for XHB is 4.4%.

What’s our total Greater Income Portfolio yield? 

If we put the portfolio together with each asset at 20% the portfolio yield would be 4.4%.

One could certainly boost that income by way of more creative income offerings. BMO does a wonderful job on the ETF front for greater income.

More income from BMO

There are certainly many opportunities for greater income and more US and International diversification. You might consider covered call products, US and International high yield bonds. You might add a US REIT.

The ‘idea’ of the Cut The Crap Investing Greater Income Portfolio is to balance that yield risk and uncertainty with quality Dividend Growth companies that offer the potential of capital appreciation and growing income. Quality meets income.

Let’s have a look at the history and potential for this asset mix, running the portfolio back to inception date for the Hybrid bond index and using quality dividend proxies for the MSCI Dividend Indices – those funds were launched in 2017. I’ve used The Canadian Dividend Aristocrat Index fund and Vanguard’s High Dividend Yield ETF.

Portfolio 1 is the Great Income Portfolio.

Greater Income Portfolio Backtest

Greater Income Total Return

We see very solid total returns.

We also see the income grow nicely with dividend reinvestment. The portfolio income is based on an initial $10,000 investment. The income for this asset mix, and from the initial investment would have grown from 4.4% in 2011 to 6.3% in 2017. That would be our yield on cost with dividend reinvestment.

Greater Growth Portfolio Income

You might decide to use this portfolio as an income base to build around. A retiree might use some semblance of this mix or add this income core to their broad-based equity holdings such as the TSX, S&P 500 and EAFE staples.

Please ensure that you understand the tax consequences for more income intensive offerings. They are not always the most tax efficient. If in doubt contact your accountant or a fee-for-service advisor. You’ll also want to check in on any currency conversion charges that might apply. It’s very important to get the right asset in the right place with respect to TFSA, RSP, Taxable and US dollar account vs Canadian dollar account.

If you can have any questions on the matter please send a note to cutthecrapinvesting@gmail.com and I’ll find someone smarter than me to get you the correct answer.

Kindly hit those share buttons for Twitter, Facebook and Linkedin at the bottom on this article. You can Follow Cut The Crap Investing at the very bottom of this page.

Happy (almost) New Year!

Dale

2 thoughts

  1. Dale: Compared to plain index ETFs, such as VCN and VUN, the management fees on these ETFs are quite high, but on the plus side, it sure is easier than seeking out and buying individual dividend paying stocks. Does the portifolio growth chart take into account the MER of these ETF’s? Thanks.

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  2. Hi Bob and sorry to the delay, some of the article comments have been ‘alerting me’ in the wrong gmail box. Yes the returns will include MERs. Most returns that you see posted will include fees. Once exception would be that many of the Robo Advisors will post returns that include the MERs of ETFs but not of their fees.

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