In a recent post we talked about why investing in the stock market during a market correction can be one of the best investment decisions one can make. But what about dividend paying stocks? Data shows that dividend-paying stocks in general provide superior returns in both bull and bear markets. But I was curious about Beating the TSX stocks in particular. How has BTSX performed after bear market corrections in the past?
The method: BTSX and the bad years
To answer this question I looked at the three worst years in the Canadian stock market in the last thirty years. These were 1990 (-18%), 2001 (-14%), and 2008 (-35%).
I then looked back at the total returns (capital gains + dividends) of the BTSX strategy vs those of the index for five time frames: in the year of those bear markets, the next year, the next three years, five years, and ten years. We know that Beating the TSX has outperformed the index over the long term, but I wanted to know what history has to tell us about what we might expect from here, in the short, medium, and long term.
Two caveats. The first should be obvious: past results are not necessarily predictive of what will happen this time. Every bear market is different. Second, I am using results published in The Canadian Moneysaver by David Stanley. These are accurate to the best of his (and my) knowledge and published in the magazine for anyone with a subscription to confirm, but it should be noted that David used a May to May interval rather than the calendar year. Thus these results may be difficult to cross reference with data you might be able to obtain on the internet.
Nevertheless, let’s get into the results.
How did BTSX perform during bear markets
From here on in the numbers I am going to present are the difference between the total return of BTSX vs the total return of our benchmark index (currently the TSX 60, previously the TSX 35). Absolute numbers are interesting, but relative numbers are useful: has it paid to stick with Beating the BTSX through bear markets?
In the same year that these bear markets happened, here is the difference between the BTSX and the index. Positive numbers indicate higher returns for BTSX; negative numbers indicate under-performance relative to the index.
As you can see, in every bear market year BTSX has either matched or out-performed the index. Beating the TSX investors beat the index by an average of 5.2%.
BTSX after bear markets
The following year
“But I don’t want to invest in BTSX stocks this year only to have them tank next year,” you might be saying. So, here is the difference between the BTSX portfolio and the benchmark index in the year following those bear markets:
This is where BTSX has really shined. In the year following every one of the last three bear markets, Beating the TSX stocks have outperformed the underlying index by 13.6% on average. I was surprised by this result at first, but upon reflection it makes sense: in times of uncertainty investors tend to seek the safety and stability of blue chip dividend-paying stocks. These numbers give me confidence in holding a BTSX based portfolio through the recovery phase of this bear market.
BTSX over the next 3, 5, and 10 years
But I’m a long term investor. I don’t want to have to shift gears after a year or two if Beating the TSX has a trend of losing steam after a year or two. Fortunately, the data tells a different story. Here we will add three more rows to our table showing that with only two exceptions, BTSX has continued to outperform in the 3, 5, and 10 year periods following the last three bear markets.
As you can see from our table, the average out-performance of BTSX over the benchmark index in the three years following a bear market was 6.3% – this was consistent across all three bear markets with a range of 3.5 to 9.2%.
It is remarkable to me that there were only two times Beating the TSX didn’t outperform its benchmark index. The first was in the five year period following the brutal crash of 2001. But this was a temporary phenomenon because the ten year period following that same bear market saw BTSX outperform the index by an average of 0.9% per year. The second, was over the 10 year period after 1990, but this was due to the massive run-up in dot-com stocks in 1999. Up until 1999, BTSX had been handily out-performing the index and the very next year saw BTSX trounce the index by over 15%.
Ten year returns after bear markets
The numbers don’t lie: using Beating the TSX to select dividend-paying stocks in a bear market has been a winning strategy in both the short and the long term. In fact, the average annual advantage of BTSX over the index in each of the ten year periods following these bear markets was 2.2%. This is in line with BTSX’s long term trend.
Here are three charts that illustrate the performance of BTSX vs the Index in each of the ten year periods following the biggest bear markets of the last thirty years.
If we were to average the returns of Beating the TSX vs the benchmark index over the last three ten year periods following these bear markets, this is what an initial $100 000 investment would have grown into:
It never ceases to amaze me that an investment strategy so simple has been so effective through multiple market cycles. With so much uncertainty in the world and in the markets, I hope this data gives you some peace of mind when it comes to your dividend-based investment strategy.