Our first Dividend Champions Portfolio was published in the May edition of the Canadian Edge. To recap briefly: The objective of the portfolio is to provide an attractive, growing income stream to investors with an estimated total return of between 8% to 15% per year over five years or longer.

The selection criteria for the stocks were all focused on supporting the main objective of the portfolio. In short, we look for companies that can sustain and grow their dividends with a reasonable degree of certainty over time. To determine this, we look for:

A track record of consistent and growing dividend payments

A rock solid balance sheet

A dividend payout ratio that leaves some wiggle room in difficult times

Prospects to grow the dividend ahead of the rate of inflation

An attractive yield

The current yield of the Dividend Champions Portfolio is 3.9% with expected dividend growth of 6.2% in 2015 and 5.5% in 2016.

The past few months have not been good for dividend-based investment strategies, with utility companies and real estate investment trusts declining as long-term interest rates moved higher in the United States and Canada. Some examples from Canada include Canadian Utilities Ltd. (TSX: CU, OTC: CDUAF) and RioCan REIT (TSX: REI-U), which declined 7% and 13%, respectively, over the past three months. In the United States, Realty Income and Spectra Energy declined 6% and 16% over the same time.

Readers should know that we measure the total return performance of the Dividend Champions Portfolio against a broad Canadian market index, the Thomson Reuters Canada equity index. It is too early to comment about the total return from the portfolio, but we continue to track the performance. Although the portfolio performance is slightly negative since inception, at –0.68%, it was considerably better than the benchmark performance over those eight weeks.

We also note that the volatility of the Dividend Champions Portfolio is considerably lower than the volatility or risk of the benchmark portfolio.

At this early stage we are satisfied that the portfolio is performing as expected, with better returns than the overall market and with lower volatility or risk.

The best-performing stock in the Dividend Champions Portfolio over the first two months was Brookfield Infrastructure Partners LP (TSX: BIP-U, NYSE: BIP), with a 7.5% return. The company recently extended an $8.8 billion non-binding offer to acquire the Australian rail and port operator, Asciano Ltd. This will fit in well with its global portfolio of utilities, transport, energy and communications infrastructure assets in North and South America, Australia and Europe. Given the strong price performance over the past two months when most other high-yielding utility and infrastructure stocks declined, we have now moved Brookfield to a Hold.

Aimia Inc. (TSX: AIM, OTC: GAPFF) was another top performer, with a 6.9% return over the two-month period after announcing market-pleasing first-quarter results. Readers would have noticed that we moved Aimia to a Hold after the strong price performance in May but as the stock has lost some of its initial gains in June, we moved Aimia back to a Buy, with the price now again at more attractive levels.

Telus one of our largest holdings, is up 6.8% after delivering solid results for the first quarter of the company’s  financial year and announcing a 10% dividend increase.

Among the laggards, we note the names of the energy pipeline companies, TransCanada and Inter Pipeline Ltd., which lost 5.1% and 6.1%, respectively, as the renewed decline in oil prices caused some concern about the profit outlook for these companies. Two of our smaller holdings, ShawCor Ltd. (TSX: SCL, OTC: SAWLF) and Transcontinental Inc., lost 11% and 18%, respectively.

We are not concerned about the long-term future of ShawCor, although the next few quarters may be challenging for this quality energy services operator.

However, we have become less sanguine about the prospects for Transcontinental, which is struggling to change the direction of the business from traditional printing to online design, marketing and packaging. While the second-quarter results were credible, the ongoing decline in the core printing business raises concerns. Despite the company’s excellent dividend-paying track record, solid cash flow and sound balance sheet, we believe that the declining trend in the core business may continue for the foreseeable future and consider the risk that the company will be unable to sustain the dividend long term as high. We have therefore decided to Sell Transcontinental.

North West is a grocer that owns 224 stores in underserviced rural and suburban areas in North and Western Canada, Alaska and the Caribbean. The company has an excellent long-term track record of profitability.

The solid balance sheet, high levels of cash flow and reasonable growth prospects provide comfort that the quarterly dividend payments will be sustainable. The dividend yield is an attractive 4.5%.

Lastly, we changed the recommendation on Potash of Sakatchewan to a Hold. Potash extended an offer to buy K&S AG, a German producer of fertilizers and salt for $8.7 billion.

We struggle to see the motivation behind the bid and are concerned that Potash Corp. may be forced to accept penal conditions to get the offer accepted by the K&S shareholders and regulatory authorities.