There is no shortage of investment blogs. You even have your choice of Canadian blogs focusing on dividend paying stocks. What makes dividendstrategy.ca special? Beating the TSX. There is no other simple, freely accessible investing method out there that can match the 30-year performance record of BTSX – and I’m proud that this is the place where investors of all stripes can come for all things BTSX-related.
But sometimes information about the method, past performance, and current portfolio are not enough. Over the last two years readers have posed some good questions; requesting additional information to help them get started with BTSX or to clarify some functional aspects of putting BTSX into action. In this post I am going to answer the top five reader questions about BTSX.
1. Aren’t you worried that Stock X on the list has (insert flaw here)? Shouldn’t the method be changed to avoid these stocks?
In last month’s post, I laid out a few reasons why I don’t necessarily buy every stock that appears on the BTSX list, but there are many more factors that strike fear into the hearts of potential investors. These are the most common questions I receive about BTSX.
“The payout ratio of Stock X is 90% – surely this would be a bad investment. Why don’t you change BTSX to eliminate companies with payout ratios over 70%?”
“The PE ratio of Stock Y is 50 – clearly it is overvalued. Why don’t you change BTSX to eliminate companies with PE’s over 25?”
“Stock Z has an inconsistent dividend history. Why don’t you change BTSX to only include companies who haven’t decreased their dividends in the last 10 years?”
These are all fair points and important considerations when deciding what stocks to include in your own personal portfolio. No one should make investments they are not comfortable holding for the long term. But it’s important to remember that the results of Beating the TSX – average annual returns of 12%+ over the last 30 years – are based on a simple, repeatable method that has remained essentially unchanged over those decades. Would an alternate method do better? Maybe. But adding criteria to our methodology now would both pollute the transparency of our process and make it less accessible to the average DIY investor.
So, no, I am not going to change BTSX. BUT, if anyone is willing to compile the data and send it along to me, I would be happy to consider including BTSX variations on this blog.
2. How do you deal with dividend cuts?
Every now and then one of our stocks will cut its dividend. This is painful because it is almost always accompanied by a severe drop in price as well – a double-whammy. But we have to remember that the long term performance of Beating the TSX has included these unfortunate events. No one ever said the system was perfect, but it’s been “perfect enough” to beat the index by almost 3% per year for the last 30 years.
Do I sell a stock as soon as it cuts its dividend? I don’t for two reasons. First, I don’t like to check my portfolio on a daily basis to be on top of these things; the evidence is clear that checking our portfolios frequently leads to bad decision making. Besides, one of the advantages of BTSX is that it is low maintenance.
Second, my observation is that by the time the dividend cut is announced, the stock price has already tanked. Sometimes the announcement is even met with enthusiasm by investors who bid the price up. Even though the evidence is clear that dividend cutters under-perform dividend-payers and growers, it is unclear to me that timing the decision to sell on the announcement of the cut is a profitable strategy.
3. How do you think Beating the TSX will perform in the future?
I think it is important to be conservative and humble when projecting into the future. When I am helping people with their financial planning, I give them projections based on 6%, 8% and 10% rates of return. I don’t anticipate that the economies of the world will grow at the rates we’ve seen over the last 30 years, so it seems unlikely that BTSX will maintain an average rate of return of over 12% as it has done until now. Somewhere between 8-10% for the stock portion of a dividend-based portfolio seems reasonable.
Will dividend paying stocks continue to out-perform? I see no reason to believe they won’t. The profitability of dividend paying and growing stocks is not a trend but a very long term feature of stock markets (here is the Canadian evidence). It makes sense to me that large, profitable companies who share those profits with shareholders will continue to be better investments than smaller, more vulnerable ventures with much higher rates of failure.
4. What have been the maximum drawdowns for BTSX in any given year? Biggest gain? Average gain?
Our data for the BTSX method go back all the way to 1987 (thank you David Stanley). Since then the worst year was 2008 with a -23.3% rate of return. The benchmark index also had it’s worst year in 2008 dropping 29.4%.
The best year for BTSX was 1996 with a gain of 54.9%. The best year for the index was also 1996 with a gain of 31.9%.
Over the last 30 years, the average annual return for Beating the TSX has been 12.5%, while the benchmark index has averaged 9.7% (as of the end of last year).
What does this data suggest? Beating the TSX has dropped less than the index in bad years and risen more than the index in good years, on average beating the index returns by about 30%.
5. Do you have any book or blog recommendations?
I read about investing and personal finance all the time. Here are some of the most worthwhile resources I have come across:
A Random Walk Down Wall Street by Burton Malkiel – to convince us that stock picking and market timing are bad ideas
Stocks for the Long Run by Jeremy Siegel – to remind us that stocks have been, and will continue to be, superior investments
Thinking Fast and Slow by Daniel Kahneman – one of my top 5 books of all time; we are fooled all-the-time – and we usually do it to ourselves
The Strategic Dividend Investor by Daniel Peris – a clear and concise explanation of why a dividend-based investment approach works
The Collaborative Fund blog (Morgan Housel) – brilliant
A Wealth of Common Sense (Ben Carlson) – check out his podcast with Michael Batnick, called Animal Spirits
Of Dollars and Data (Nick Maggiuli) – deep dives into relevant topics
Humble Dollar (Jonathan Clements, et al.) – his book, How to Think About Money, is also great
As always, I hope this content is helpful. Feel free to let me know in the comments