David Stanley is a private investor and a contributor to Canadian MoneySaver magazine. It was also part of the Canadian MoneySaver event at the World Money Show. His talk was entitled "Beating the TSX - It Works". He said that he does not trade a lot.
He had six points to cover in this presentation.
- Why should I invest at all?
- In what should I invest?
- Why invest in big cap Canadian stock?
- How does beating the TSX work?
- How has beating the TSX performed?
- The downside and what it is.
There would not be enough people working to fund retirement. Younger people out of university are deeply in debt. You might consider investing to send the kids to school, to make big purchases or leave something to your heirs. Money gives you freedom.
The next point is in what should I invest? Common stocks and fixed income products have the best and safest returns. Pick a ratio that suits you best. With government bonds and GICs you hazard a negative real return at the present time.
|Item||10 year return||3 year return|
|TSX||8.3% per year||1.3% per year|
|S&P500||2.2% per year||5.9% per year|
|5 yr. GIC||2.5% per year||1.9% per year|
|CPI||1.8% per year||1.2% per year|
|MSCI World Index||4.8% per year||4.9% per year|
|TSX60||8.4% per year||0.4% per year|
You should invest in the US because it is safer. Put 5% in the US, 10% internationally and the rest in Canada. The US is not as safe currently because of the recent problems. Why would you invest in CICs? The reason is capital preservation. If you have a pension, count this as fixed income product.
He thinks we should put most of money in Big Cap stock. Your total return will be both capital gains and dividends. Over the long term, dividends will be 50% of your total return. For investment income, dividends are the best way to go. The crash of 2008 saw dividends holding up better than other investments. Dividends are the dictate of management. Capital gains are the dictate of the market.
The blue chips stocks are the big companies. The TSX does not have good blue chip stocks in all sectors. High dividend stocks tend to outperform in the market. You can compound your return in dividend stocks by reinvesting your dividends. For the best return on the market, it depends on initial investment amount and time and frequency of compounding.
High yield sectors are Telecoms, Utilities, Real Estate and Financials (TURF). There are no REITs in the TSX60. There was a recent dip in stocks because interest rates rose and people were saying get out of dividend stocks. They did go down initially, but are now back up again.
The TSX total return over the past 10 years compared to the TSX Index. Index is up 82.96% and the Total Return is up 149.90%, a 67% difference. Source is the G&M. Chart is for TSXT-I compared to the TSX-I chart. (Total return index assumes you reinvest dividends paid.) It is striking how much of the total return index was reinvested dividends.
The following chart shows the compound annual growth rate (CAGR) for several investments investing in Canadian dividend stocks.
|Mutual Funds||2.2 - 2.4%||6.6%|
|ETFs||0.30 - 0.60%||10.4%|
|Total Return Index||(non-investable)||10.7%|
|BTSX||< or = 1%||12.9%|
Michael O'Higgins wrote the History of Beating the Dow. BTSX is beating the TSX. The TSF35 was the precursor to the TSX60. The TSF35 was the index between 1982 and 1995. The BTSX was beating the TSX. You would buy the top 10 of the TSX60 by yield. You would therefore buy the cheapest stocks. (This index did not include any income trust stocks.)
To do the BTSX, you buy equal amounts of each of the 10 stocks and you allocate at least $1,000 to each stock. If a $10,000 investment is too high, buy the 5 highest TSX60 stock by dividend yield. Each year replace the stocks with the current top 10 stocks by dividend yield. This would result in a 5 to 10% change a year. Stocks may no longer be part of the highest yielders because their price has gone up.
Stocks prices are volatile as stocks do not trade on fundaments, but on emotion. High beta stocks are the most volatile. These tend to underperform the low beta stocks across time and countries.
Why does BTSX work? First, stock price and yield are inversely related if dividend is constant. Dividend yield is annual dividend divided by the stock price. Stocks are only a good investment if you do not pay too much.
Low beta Blue Chips stocks would be TD Bank (TSX-TD), Fortis Inc. (TSX-TFS) and BCE Inc. (TSX-BCE). Stock will exhibit significant cyclicality over time. Stock prices are unpredictable over time. We are simply and efficiently exploiting small but favorable valuation shifts over time. The average return for the BTSX since 1987 is 12.56% and for the Total Return TSX is 9.52% per year. In the past year the BTSX return was 15.36% and for Total Return TSX was 8.039%. The BTSX is getting close to doubling the TR TSX from last year to this year.
There is a downside risk to the BTSX. The down side risk is lower returns, higher inflation, higher taxes, more volatility and irrational markets for investors. These are structural changes.
What is the probability that my portfolio will survive a black swan event unscathed? David Stanley thinks that on a reward-risk scale, the BTSX has a high reward and moderate risk. You can get more information on this at Money Saver Files. You might get more information on BTSX at Money Saver Files.
Note that only 10% of actively managed mutual funds outperform the TSX over a 5 year period. The MERs of 2.36% will kill you. The BTSX is passive investing and the risks are:
- Prices may dip if bond yields increase.
- BTSX portfolio is typically overweight in Financials, Utilities and Telecoms, which are interest sensitive.
- You have no one to blame but yourself.
- Taxes on dividends may increase.
- The index itself can have problems (like 2000 when NT was 33% of index).
- Dividends may not increase or be cut.
- You can get a user error by not staying the course.
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.