A dividend portfolio still beating the market after all these years

A dividend portfolio still beating the market after all these years

Investing in the stock market isn’t rocket science, according to retired university professor David Stanley. Ten dividend stocks are all that’s needed, selected according to a simple rule.

It’s so simple that less than an hour of effort is required every year. Yet the returns are pretty good – good enough, in fact, to beat the market.

“I am now 81 and have been a dividend investor since 1995, the year I retired,” Mr. Stanley says. “I also wrote about that adventure in my ‘Beating the TSX’ [BTSX] columns in the Canadian MoneySaver magazine [for about 20 years].”

“Since I retired from writing the articles, first Ross Grant and then Matt Poyner have continued updating the BTSX, and it’s nice to see that it is still outperforming the S&P/TSX Total Return Index,” notes Mr. Stanley. “Matt does updates on his blog [dividendstrategy.ca], which I occasionally contribute to.”

Regarding BTSX performance, Mr. Poyner writes on his blog: “As of the end of 2019, the 30-year average annual rate of return using the ‘Beating the TSX’ method was 12.5 per cent … the benchmark [S&P/TSX 60 Index] averaged 9.7 per cent.” The BTSX also beats the market over periods of one, three, five, 10 and 20 years.

The BTSX portfolio is a Canadian version of the “Dogs of the Dow” strategy espoused by U.S. investment manager Michael O’Higgins in his 1991 book, Beating the Dow.

The Dogs of the Dow buys the 10 stocks with the highest dividend yields in the Dow Jones Industrial Average. Equal dollar amounts are invested in each. And there is an annual rebalancing that replaces stocks if their yields are no longer in the top 10.

The BTSX selects the 10 highest-yielding stocks from the S&P/TSX 60 Index at the turn of the year. It also uses equal weights and annual rebalancing.

In essence, the BTSX is a variant of the value approach to dividend investing pioneered by Tom Connolly in 1981 with his newsletter, Mr. Stanley says.

Like the Dogs of the Dow portfolio, the BTSX uses dividend yields as a value metric. A high dividend yield often signals that a stock price has fallen to undervalued levels.

Indeed, dividend yields can be more reliable indicators of value than earnings or book value. That’s because they represent payments of cash and thus are not subject to misrepresentation by accounting manipulations.

Alternatively, high dividend yields can sometimes signal that a company is in a terminal downward spiral or about to cut its dividend. But selecting dividend stocks from blue-chip indexes lowers this risk. A well-established company usually has a good chance of recovering from a rough patch because it can rely on extensive resources, customer bases, revenues and managerial talent.

This year’s BTSX stocks, picked at the beginning of 2020, are shown in the accompanying table. Investors can start a BTSX any time. The list of 10 stocks will just be different.

The COVID-19 pandemic knocked TSX stocks down by more than a third in March and they still haven’t fully recovered from the peak just before the crash. “As devastating as these price declines have been, they are not of primary significance to dividend investors,” Mr. Stanley says. It’s the dividends that matter.

Out of the 10 stocks, only one dividend was cut – that of Inter Pipeline Ltd. – while six were increased in 2020, he adds.

The BTSX will have periods of underperformance – even worse than what we’ve seen in 2020, if the past is any guide. The financial crisis of 2008-09, for example, was particularly difficult. Such periods will test the patience of investors and lure some away from the BTSX. They may come to regret their decision. Only those who stay the course have a chance, according to BTSX believers.

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Published at Sat, 26 Dec 2020 18:05:47 +0000