To bear trials with a calm mind robs misfortune of its strength and burden.Seneca
Last year wasn’t just a year of hardship; it was also a year of lessons. The pandemic forced us to change how we work, how we play, how we interact with each other and how we take care of ourselves. This virus has wreaked havoc on our lifestyle, our health (mental and physical), and, for many of us, our investments. We can hate the pandemic, work ourselves into a frenzy of resentment, but the virus doesn’t care. As Seneca advises, our challenge as individuals is not to fight in vain against misfortune, but to control our reaction to it.
Dividend investors in Canada had an especially tough year. In 2019, Beating the TSX trounced the benchmark index. Unfortunately, the BTSX 2020 portfolio didn’t fare so well; the pandemic and crashing oil prices decimated some key BTSX stocks like IPL, PPL, and ENB, pulling the whole portfolio down. Only two stocks from our January 2020 list had positive returns, CIBC and Telus, and even those were barely positive. Overall, the BTSX total return was -10% for the year vs. +5% for the index.
No one likes negative returns, but they are inevitable if you invest in the stock market. An underappreciated investment skill is the ability to process bad news in good ways. In light of these results, here are three things dividend investors should remember.
1. Don’t be blinded by short term numbers
We are long term investors, so single year numbers are of limited utility. Sure, this blog tracks the annual performance of the BTSX portfolio, but one year is just one data point. Ask yourself: What is my investment time horizon? If it is less than five years, you probably shouldn’t be invested in the stock market at all. Even though our short term returns this year aren’t great, the 10, 20 and 30 year BTSX returns are solid.
I don’t like the one year returns on that chart either, but it’s deceiving; remember one year is just one year, and we have over 30 years worth of data for BTSX. The following graph shows the performance of BTSX vs the benchmark index for the past 34 years; 2020 is at the top and 1987 is at the bottom. As you can see, BTSX has a strong history of beating the index, with a few notable exceptions – more on that in a moment.
Viewed in an even more meaningful way, consider the growth of $10 000 over the last 30+ years using BTSX vs a TSX 60 index fund. In spite of the minority of years that BTSX lost to the index, sticking with a BTSX-based investment strategy would have resulted in a 72% larger investment balance.
Do not let one year of lackluster returns derail your investment plan. Every good investment plan will have periods of underperformance. When it comes to dividend investing, wealth comes to those who wait.
2. BTSX shines after bad years
Furthermore, Beating the TSX has an incredible track record of bouncing back after bad years. Consider 1999: that was BTSX’s worst year on record with a return 37% worse than the index. Horrible, yes, but if one had invested $100 000 using the BTSX method starting right after this horrendous performance, by now it would have grown to over $700 000 vs. only about $400 000 if one had chosen an index fund.
2020 was BTSX’s second worst year, but my bet is that investors who stick with a dividend based investment strategy like BTSX will be glad they did. When we re-focus on timeframes that actually matter, dividend investing is clearly the way to go. A good investment plan is not one without periods of underperformance, but one that is durable enough to recover and outperform.
3. Dividend investors have the luxury of ignoring stock prices
Lastly, it’s important to remember that stock prices are just stock prices. When you are invested for the long term and funding your living expenses primarily with dividends, it doesn’t matter what stock prices do. As I described in this post, it’s the dividend payments that matter – and BTSX stocks rarely cut their dividends. Even though IPL did cut its dividend payment by 72% this year, this was largely offset by six other BTSX stocks (ENB, CM, BCE, PPL, POW, and EMA) raising their dividends in 2020.
Your results could be better
Beating the TSX is a tool, not an instruction manual. Some will follow the method exactly; most will adapt it to suit their needs by:
- holding on to good stocks with slightly lower yields
- avoiding stocks with worrisome fundamentals
- buying more or less stock based on personal assessment
- investing in stocks other than BTSX for diversification
For example, when I reviewed IPL on this blog in 2019, some readers expressed concern that the dividend payout ratio was too high and weren’t comfortable owning it. In hindsight, their assessment was right. Foresight is another story.
There is value in following a rules-based investment strategy, but investors need to be comfortable with their investments. I mention this for two reasons. First, to emphasize that Beating the TSX is a means of identifying potential investments for your portfolio and does not need to be followed dogmatically. And, second, in case these one year results seem scary, don’t let them dissuade you from dividend investing in general. The evidence for a dividend-based investment approach is sound and you can customize your own approach.
Performance of BTSX vs TSX60 in 2020
For those who are chomping at the bit for details, here is the full accounting of the 2020 BTSX portfolio. For the purposes of data tracking, this list is based on the stocks that appeared in the portfolio on Jan 1 2020 (for a description of the BTSX stock selection method, go here).
Beating the TSX 2021
Here is this year’s list of stocks, generated based on closing prices and yields on December 31, 2020 (EDIT: BPY-UN was removed from this list on Jan 6, due to news that it would be going private; it was replaced by EMA):
The average yield for the current portfolio is a generous 6.13%, far higher than anything investors can find in fixed income these days, with the added benefit that dividends receive preferential tax treatment.
If you felt stung as a dividend investor in 2020, you are not alone. I own IPL, ENB and PPL, so I feel your pain. On the other hand, it’s just one year. I hope this post helps you understand how to keep these inevitable periods of underperformance in perspective.
In summary, remember these three things:
- Don’t be blinded by short term numbers; it’s the long term that matters
- Beating the TSX has a history of out-performing the index, especially after bad years
- Dividend investors have the luxury of ignoring stock price fluctuations; even in 2020, dividend income was remarkably stable
The longer we dwell in our misfortunes, the greater is their power to harm us.Voltaire
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