Is a Dividend-Heavy Strategy the Key to Outperforming the TSX?

In less than six months, the COVID-19 pandemic has plunged the global economy into one of the worst financial crises in economic history. On 12 March 2020, Canada’s …

Stock Market

In less than six months, the COVID-19 pandemic has plunged the global economy into one of the worst financial crises in economic history. On 12 March 2020, Canada’s benchmark equities index, the S&P/TSX Composite Index, experienced a 12 percent decline, its biggest single day drop since 1940. As business and trade activity stuttered to a halt, the S&P/TSX Composite Index crossed into freefall, dropping to a low of 11,228 points on 23 March. Since then, the benchmark index has staged a slow, broad-based recovery.

Encouragingly, with more and more countries passing or projected to pass the inflection point on the COVID-19 viral curve, other global economies, especially developed markets in Europe and the Indo-Pacific, are expected to register similar rebounds. Nevertheless, with a COVID-19 vaccine likely some ways away, Canadian investors are still bearish, with many remaining understandably wary about putting their hard-earned funds back into already fragile domestic and global markets. In an effort to safeguard capital and improve yield conditions, many investors are adopting alternative and/or historically ‘safe’ investment strategies.

In the long-term, a dividend-heavy investment strategy has proven to be one of the most reliable ways to outperform the TSX. In fact, given the current bear market, portfolios with exposure to the best Canadian stocks to buy 2020 will almost always include a strong base of dividend-heavy equities. If you’re ready to refine and update your approach to investing, we’ve listed a detailed overview of exactly how you can optimize your portfolio and take advantage of the dividend-focused Dogs of the TSX strategy.

Breaking Down the Dogs of the TSX Strategy

The Dogs of the TSX strategy, named after the US-centric Dogs of the Dow, provides investors with an effective framework for sorting and selecting dividend-heavy equities in Canada’s S&P/TSX Composite Index. If you’re not sure how to implement the Dogs of the TSX Strategy, we’ve listed a brief step-by-step outline below:

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  • Step 1: Concentrate your analysis on the 60 largest companies in the S&P/TSX Composite Index (TSX60).
  • Step 2: Categorize these companies according to dividend yield. Barring exceptional circumstances, you should then remove any companies that have prior income trusts or a reputation for dividend cuts and/or pauses.
  • Step 3: Looking at the remaining stocks on your list, purchase equal cash positions in the top 10 companies. 
  • Step 4: Monitor your positions and reassess in the new year. At this point, check for any changes in the broader S&P/TSX Composite Index. If the changes affect your ranking of the TSX60, exit and update positions that no longer fit the criteria listed in Step 2.

Now, we realize that shuffling and rebalancing your portfolio is a nuisance, but we assure you that this strategy is worth the trouble. By consistently monitoring and tweaking the Dogs of the TSX Strategy, your portfolio will be well-positioned to benefit from the rebounding performance of dividend-heavy Canadian companies.

Should You Still Consider Dividend Stocks?

Absolutely! Remember, the entire Dogs of the TSX strategy rests upon the idea that a significant number of Canada’s top publicly traded companies are undervalued when you consider their resilient capital growth and strong history of robust dividend yields.

Because of the size of the S&P/TSX Composite Index, the Dogs of the TSX strategy will usually give you exposure to multiple sectors of the Canadian economy. Earlier this year, the Million Dollar Journey applied the principles of the Dogs of the TSX strategy to select the following 10 dividend-heavy companies: Enbridge (ENB), CIBC (CM), BCE (BCE), Scotia Bank (BNS), Great-West Life (GWO), Telus (T), Emera (EMA), TransCanada Corporation (TRP), Bank of Montreal (BMO), and Brookfield Infrastructure (BIP).

In this example, the Dogs of the TSX strategy introduces you, the investor, to a multi-sector spread of stocks in telecommunications, pure and pipeline utilities, infrastructure, and financial services. If you’re of a mind to expand and diversify your portfolio beyond these sectors, we recommend supplementing your initial positions with further investments in blue chip real estate, resources, and technology companies.

Should You Focus Exclusively on U.S. Stocks?

In ordinary circumstances, focusing exclusively on dividend-heavy U.S. stocks would be a viable strategy for beating returns on the S&P/TSX Composite Index. Unfortunately, these are far from ordinary circumstances. Even though the S&P 500 has managed to cling on to the modest gains made over the last month, it’s important to remember that the U.S. is still leading the world in COVID-19 cases, this is true for both the country’s total confirmed cases and it’s active case load.

Despite these conditions, much of the U.S. is expected to continue accelerating plans to reopen the economy. As states lift economic and business restrictions, we’ll likely observe a sharp multi-sector rally in U.S. stocks. However, public health modelling from the Federal Emergency Management Agency predicts that reopening the U.S. economy will also lead to a sharp uptick in daily COVID-19 cases. Left unchecked, this epidemic yo-yo could eventually necessitate the implementation of a second or even third round of economic lockdowns. At this point in time, the very conceivability of this outcome should be enough to dissuade most investors from focusing exclusively on U.S. stocks.

Admittedly, much of this reasoning is derived from estimate-dependent epidemiological models. If you have experience in U.S. equities and can tolerate a higher than average level of risk, then of course a focus on U.S. stocks could still net TSX beating returns.


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