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How to use BTSX in real life

Having just posted our annual Beating the TSX update, I’m receiving lots of good questions about how to put the Beating the TSX method into action.  I hope this updated post helps clarify the most common concerns.

If you are interested in trying out this method, I have a suggestion: give QTrade a try.  They have just been rated the #1 self-directed online brokerage in Canada yet again.  I have been using them for over ten years and can honestly say that they have made me a happier and more effective DIY investor with their amazing customer service and easy-to-use platform.  If you use the links on this site, you will have access to a very generous cashback offer.

I love woodworking.  Yes, that’s really my workbench up there.  My father-in-law introduced me to this hobby soon after I got married – it was a rough introduction.  One day, before I had my own tools, I brought a piece of wood over to his place to cut. 

“The table saw is downstairs.  Help yourself.  Just make sure you keep the piece tight to the fence.” 
“Okay.  Thanks.”  I had never used a table saw.  But I went downstairs anyway, not really understanding what his instructions meant but fairly confident I could figure it out once I got in front of the machine.

The big motor spun the carbide-tipped blade with ferocious speed.  About halfway through the first cut I shifted the piece a fraction of an inch to the left – BANG!  The piece of wood was ripped out of my hands, the metal teeth grabbed the fibers and hurled it through the air into my chest. 

The bruise lasted for weeks, but I was otherwise unharmed – a close call.

When you’re unfamiliar with a tool, every little step is important.  When you have experience, there are things you do automatically -essential steps in the process that a beginner might not think about.  

Beating the TSX is like the table saw – a simple, powerful tool.  This one is used to build an investment portfolio.  Used well, it can achieve excellent results.  Used improperly, your financial health might be in jeopardy.   

Those of us who have been using Beating the TSX for a while (over ten years, in my case) can attest to the fact that, in addition to generating excellent returns, it is both simple and versatile.  But, as with any tool, it helps to see how it’s wielded by more experienced hands.  I wish I had watched my father-in-law use the table saw before I went at it. 

In hopes that it will help you on your investing journey, here is how I actually use the BTSX strategy.

How often do I buy BTSX stocks? 

I buy stocks once a year.

I like investing, but find market volatility exhausting and meaningless.  Once a year I use the BTSX list to buy big, blue-chip dividend payers that I will hold for the next twelve months.  I try to do it at the beginning of January, but I’m not strict about that.  In between, I try hard to ignore what the market is doing.

What do I do with the dividends?  It is now easier than ever to enroll in dividend reinvestment plans (DRIPs), even if you use an online discount brokerage.  With QTrade, you just go to “Service Center”, scroll down to “Dividend Reinvestment”, and select the stocks you would like to DRIP.  Easy.  I do this with the stocks I am confident will be long-term holdings, which is most of them. 

Other funds that arrive in my account, either through contributions or dividends is used to buy index funds.  This way, I can avoid paying attention to stock prices and enjoy the benefits of more time in the market.  Some of this money accumulates as cash, but I have found that holding cash is a psychological hurdle to investing.

The idea of holding cash is that if there is a downturn big enough to draw my attention to the markets, I will consider using the accumulated cash to buy more of the BTSX stocks while they are on sale.  I also have a secured line of credit that I may use to invest if stock prices really crash.  This is leverage, it’s risky, and I haven’t done it yet, but I have set up the option.

I do not buy or sell based on month-to-month changes in the portfolio.

At the end of the year, do I sell companies that are no longer on the list?

In an average year, only three or four of the BTSX holdings will drop off the list to be replaced by three new companies with higher yields.  Holding on to the ones that remain on the list decreases our transaction costs. But what about the ones that were nudged off? Do I always sell the stocks that no longer appear in the portfolio?  Not at all.

I will hold on to good companies that still pay good dividends.  Generally, they have fallen off this list because of increases in their stock price, rather than a decrease in their dividend.  I am still a happy owner of large stakes in Fortis (FTS), Bank of Montreal (BMO) and SunLife Insurance (SLF), for example – and may be an owner for life.

If, on the other hand, a stock drops off because they cut their dividend and new issues have come to light that will negatively impact long-term performance (I don’t care about short-term issues), I’ve learned it’s best to cut them loose during my annual review.  Other veteran BTSXers (like Ross Grant, the previous CMS author of the series) will sell these companies as soon as they cut their dividend.  There is no wrong answer here, but there are behavioural risks involved in watching stocks too closely.

Do I buy every stock on the list?

When I started using the Beating the TSX strategy, I bought every stock on the list in equal parts.  This can be a very sound strategy, as long as you understand the risks involved (mainly under-diversification),  and is the method that is used to calculate our excellent long-term performance.

More recently, I have become more selective.  For the most part, I still buy every stock, but I buy less of stocks that have inconsistent dividend histories or highly concerning fundamentals. 

In past years certain stocks have appeared on the list with very worrisome fundamentals indeed:  short, inconsistent dividend histories and declining earnings in troubled markets.  These are the stocks that tend to cut their dividends and experience the biggest price drops.  I bought them and regretted it (ABX and IMG come to mind).  I wouldn’t buy them now.  

I’m not saying these calls will improve my performance, but they do let me sleep better at night – and sleeping well with your investment plan is probably the biggest factor in it’s success.

Do I buy non-BTSX stocks?

Beating the TSX makes up a portion of the Canadian part of my portfolio.  There are two reasons I buy other Canadian stocks. 

First, BTSX stocks tend to be concentrated in telecoms, utilities, energy, and financials.  It makes sense to gain exposure to dividend-paying stocks in other sectors.  Examples from my portfolio include MG in industrials, NTR in materials, and CTC-A in consumer discretionary.

The second reason I buy non-BTSX stocks is to add some dividend growth stocks to the dividend yield stocks that BTSX selects.  There is plenty of evidence for both approaches and I prefer to have exposure to both.  The good news is that the same stocks that provide sector diversification can also be dividend growth stocks.

What about international exposure?

For a long time, I was vastly under-diversified internationally.  There are good arguments for this, especially as a dividend investor due to the favourable tax treatment that eligible Canadian dividends receive.  Furthermore, BTSX stocks have done very well.  But that may not continue, and there is good evidence to show that international diversification improves risk-adjusted returns.

I achieve international exposure with ETFs, in particular, XAW, which is the iShares Core MSCI All Country World ex Canada ETF.  I also think that the emerging markets are great long-term investments while currently being undervalued, so I hold some additional XEM, iShares MSCI Emerging Markets Index ETF.

Conclusion

I hope this article is helpful in illustrating how I use the BTSX strategy in real life.  As David Stanley, the original author of the series is fond of saying:  “BTSX is all about constructing a long-term buy-and-hold portfolio of Canadian blue-chip stocks that have been acquired at a reasonable price.”  It is one tool in your investing toolbox – a very powerful and effective one if used well, but certainly not the only one most investors will need.

If you’ve been using BTSX for a while, we would love to hear how it integrates with your larger investment plan. If you are just starting out, how do you anticipate using BTSX?  Just post in the comments!

If you found this post informative and/or helpful, please consider donating to help with the cost of running this blog.  Don’t forget, half of all donations are given to Doctors Without Borders.

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This Post Has 38 Comments

  1. Terry

    Hi, I am a newbie with a question. You say that you will sell a stock because theyield has dropped usually because the stock price has risen, but does your dividend not stay the same (based on number of shares) even though the stock has risen and given that your acquisition cost does not change, your yield would still be the same. I am considering using the “btsx” in retirement to live on the dividend yield while not reducing the principal unless for special reasons.

    1. admin

      Hi Terry – on the contrary, I will often hold a stock if the price has risen and the dividend has not been cut. I will seriously consider selling if a company cuts its dividend.

    2. Ross Grant

      Hi Terry, This may help answer your question. When you purchased the stock at a certain price you calculated a dividend yield. As you stated, this original yield does not change if the dividend remains the same. As time goes on the market price changes and thus dividend yield calculations will be different for the next purchasers of the stock. When time comes to make your annual list you will use the “current” price of the stock to do the yield calculation and you will see the yield will be different. You base your BTSX list on the current market price. I hope that clarifies.

      1. admin

        Thanks for expanding on this, Ross!

  2. Todd

    Great article. This cleared up a number of questions I had. Please keep the articles coming!

    1. admin

      Excellent, Todd. I appreciate the feedback!

  3. Jeff

    I am new to the BTSX strategy. I subscribed to the Canadian Money Saver in January and read the BTSX article. I agreed and liked the strategy so made some equity sales and bought BTSX stocks I didn’t currently own. I plan do this annually for a few years and see his it goes.
    I like your website and articles. Thank you.

    1. admin

      You’re welcome, Jeff. I’m curious if you were with a financial advisor before or buying index funds . . .? Happy to have you here and I think you will find BTSX quite effective. This site is nice for people who are already established with their investment plan, but my hope is that it is truly useful for those starting out. Please feel free to reply here or send me an email with suggestions for other useful content. Thank you.

  4. Terry

    Hi, Terry here again. Thanks for your replies to my question. I keep thinking about this strategy and the more I read and investigate, this strategy appears to quite low in risk to principal since the dividends supply my needed income while not having to touch the principal. What are your thoughts regarding risk? I am currently with a large institution financial advisor invested in 60% bonds and such and 40% equities.

  5. Sel

    Hello, Great article. I am interested in implementing this strategy in 2020 .

    Have a question in regards to year 2. I am playing this out in my head, so please bear with me.
    a) Technically on Jan 2, I would have to regenerate the list. Do I have to sell all stocks on Jan 2 and re-buy at equal amounts? What if a stock is still in the top 10 but its original book value has dropped or risen. What is the best strategy to do this?
    b) do you DRIP the dividend?
    c) does this work well if you add new money to the mix?

    Thanks and appreciate any response.

    1. admin

      Hi Sel, I think if you re-read the article you might find the answers to a few of your questions but I understand that this stuff can be overwhelming at first. Let me see if I can help.

      The thing to remember is that BTSX is simply a tool to identify potential investments and develop a dividend-paying portfolio over time. The method is rarely followed dogmatically by investors; it exists so that we can assess the overall strategy as scientifically (transparently) as possible. So . . .
      a) No. Please don’t sell everything and re-buy – needless transaction costs and tax implications (if in an unregistered account). Usually there are only a few changes to the list. I would look seriously at selling a stock that has cut their dividend, otherwise I would pare my ownership of those that have gone up in price and use the proceeds to buy the newcomers to the list. But this is just one way to do things.
      b) Many people use DRIPs. So far I haven’t felt the motivation because transaction costs are so low nowadays.
      c) Of course. In fact, if you are in the accumulation phase, your savings rate is likely far more important than your investment returns (this is usually the case for the first 10-15 years of investing)

      Hope that helps, Sel!

      1. Sel

        Thank you so much for taking the time respond. You are right. Most of the answers were already in the article. I learned of BTSX recently via another financial blogging site. Since then, I have been googling and skimming through articles. This is the mistake I did when i arrived on your site. And when I saw you are actively responding, I thought of asking instead of seeking msyelf. Your site is very well organized and carries a lot of BTSX info. I have bookmarked it for when i am ready. Thanks again for responding and for what you do to help us all out.

  6. Joe

    I have a thousand questions! I started BTSX a year ago. I just “leveled-up” using my own tactic that seems to go against the core principle of “buying and selling” in favour of only “buying”. My rationale was, “why sell BTSX stocks that will continue to be on the plan for another year rather than simply buying more of the ones that will bring my distribution back to 10% per stock”. I feel that if I plan to hold the stocks somewhat indefinitely, there should be no reason to sell and, in fact, I would be buying them at a relative “discount” amongst the group because they either decreased in price (but their principles still dictate they remain in the BTSX strategy) or their peers in the group have grown making them less attractive purchases only considering price.

    I am a newbie investor so I’m sincerely asking my first of 1,000 questions about BTSX – what downsides are there to the above decision?

    1. admin

      Bang-on, Joe – this is the rational way to use BTSX. No one should be selling and re-buying the same stocks. I will try to make that more explicit in the post.

  7. Joe

    Whew… great to get validation on that point. Thank you!

    My next question – I’ve setup automatic payroll deductions so I accumulate funds in my self-directed RRSP account over time. I’m not sure if there are strong opinions either way on this but it seems to be more sensible to accumulate a significant enough bank of funds to make a trade so not to be subjected to a high commission rate (relatively speaking) per trade. For example, if I contribute $500 bi-weekly and trade bi-weekly with a $5 commission, I’m consistently paying 1% to invest. So my question is essentially around cost/benefit, not having done the calculus for either scenario, am I sacrificing dividend and growth opportunity by waiting to make an annual trade while benefiting from a very low commission? Or is it better to trade say quarterly to capture dividends and growth? Is there a rule of thumb – eg. as long as cost of trading is <1% trade as often as you can?

    1. admin

      As with all things investing, there is the mathematically correct answer and the actual correct answer, which is a little more fuzzy. Mathematically, with trading commissions so low, the right thing to do is invest your $500 bi-weekly. Unfortunately, the unavoidable side effect of that action is that you will pay more attention to what the markets are doing, which will inevitably tempt you to make other trades. Not good; loss aversion is a b*tch. If you can control this impulse, great. If there is any doubt, I would consider letting the cash accumulate until you are ready to sit down and re-balance your whole portfolio according to your plan.

  8. Jason

    Hi Matt. I thank you for taking the time to help the average investor.

    Just a question about the BTSX strategy. Wouldn’t pipelines face headwinds in the future because of the increased electric car usage and decreased need for fossil fuels?

    1. admin

      Hi Jason, thanks for the kind words.

      With respect to the BTSX strategy, I’ve been reminded again and again over the years that every stock faces some kind of headwind and I am not very good at predicting which ones will overcome them and which ones won’t. All I know is that over the last 10, 20, and 30 years, BTSX has done extremely well without the headaches of trying to make such predictions. More recently, 2021 has seen BTSX up 33% vs. only 16% for the index. That says something.

      I have dabbled in “active investing”, but the bottom line for me is that I will do better by not playing the stock picking game.

  9. BadDogTitan

    Hey, Matt. I am trying to determine the best way to build my BTSX portfolio. In terms of 100% of mine and my wife’s total assets, my wife’s are held in a LIRA (48%), RRSP (13%), Spousal RRSP (5%) and TFSA (4%), and my assets are in an RRSP (27%) and TFSA (4%). As an aside, my main priority is to top up our TFSA’s to the max while I still have 10 years to work (bad financial planning advice).

    What is the best way to purchase a BTSX portfolio across the six accounts to minimize transaction costs, yet still provide flexibility for yearly rebalancing?

    Thanks!

    1. admin

      A kitchen that is actually used to prepare food is not a pristine gleaming masterpiece of design that you see in a magazine. Similarly, portfolios that get the job done are often just a little messy, in a utilitarian kind of way.

      Others may have a different perspective on this, but I think the important thing is to loosen our ideas about neat, clean, perfectly balanced portfolios, and embrace low maintenance, functional portfolio design. I don’t worry about being “out of balance” by a few percentage points if it means I can have all of Stock A in one account vs. spread across three different ones. But that’s my preference for simplicity coming through.

      Having said that, I would suggest starting by figuring out what you want to invest in and in what proportions. Don’t forget bonds, cash, ETFs, etc. Then look at your total amount and calculate approximately how much to invest in each stock/fund based on the plan that you laid out. Finally, look at the starting balances in each account and figure out what investment “chunks” will fit best in what accounts. Don’t forget foreign dividends will be subject to withholding tax if not held in an RRSP or LIRA.

      Hope that helps.
      ~Matt

  10. Gus

    Matt , Thank you so much for this updated article! I do hold 8 out of 10 of them since I’m trying to stay away from oil and pipeline so no CNQ and PPL , the BTSX is so simple and like you said it doesnt have to be your whole portfolio but part of it , I do hold those 8 and few others and I also dold a good chunk of VCN and a bigger one of VUN that gives me exposure to the US and international market so yeah you can invest the way you feel it’s best for you no right or wrong.
    Thanks again Matt.

    1. Matt

      Thanks for the comment, Gus. My understanding is that VCN is all Canadian – do you feel that this diversifies you within Canada? And VUN is all US, no international. Am I wrong?

      1. Gus

        VCN is all Canadian and my plan is to sell it and buy more canadian dividend stocks , you see I started as an index investor and slowly switched to individual stocks ,so the final goal is to hold ~20 Canadian blue chip stocks plus VUN and yes no international because all of the big US companies have businesses overseas .

  11. James R

    My implementation of BTSX started with a modest inheritance I received when both my parents passed in 2019. The insurance and investment dollars came in tranches. The first thing I did was pay off a six figure line of credit that I let get out of control with some absolutely embarrassing and very detrimental investment decisions.

    I was looking for a way to be a good steward of the inheritance but also needed a stronger than average return. I found the BTSX and got started immediately. Unfortunately for me, the first tranche was invested in the third week of January of 2020 – you can probably see where this is going. By mid-March I felt like my investing curse was manifesting itself all over again, even with what I knew were good decisions. But, I looked at history, and history taught me that all drops cease, and are usually followed by a decent rebound.

    The first series of investments I think I bought into 9 of the 10 from the list and chose to double up on BPY.UN. Some would say that was risky, but it turned out to be a great decision; once the COVID turnaround started rolling. When they announced the deal to be “acquired” I was up about 40% and moved the money into others that were currently on the list.

    With about 6-7 years to go before my desired retirement at age 60 I decided to go “all-in” with BTSX and started doing exactly what you described above as a potential opportunity. With my newly zeroed out line of credit I began buying more BTSX stocks in tranches and even did a bit of swing trading.

    I did expand a bit beyond BTSX looking for other good dividend payers, such as CPX, and a couple of REITs.

    Although I don’t think yield on cost is a great metric to use it’s currently sitting at 7.23%, and my current overall yield is 5.73%. I’m quite happy with my decisions and continue to hold all of the positions I purchased. In fact, I don’t really have the capital to add the newer arrivals on the list – it is what it is. More than 75% of my BTSX portfolio is in my non-registered account and so I’m reluctant to sell say, BMO where I’m up 76% due to the capital gains that would be triggered.

    Today my interest charges are 28.8% of the dividends I receive (in the non-registered account) and of course it keeps improving with every share I DRIP. I’m paying the interest out of money that would normally go into additional investments, but I’m comfortable with it, especially since it’s tax deductible. Once interest rates start to rise though I’ll have to evaluate whether or not to start taking some capital gains, and pay down the line, or maybe not DRIP everything so there’s a bit of cash to pay the interest – time will tell. I don’t think it will bother me much until the ratio starts to go over 39% or so.

    Really, BTSX saved me from myself and completely refocused my approach to formulating a retirement plan and I’m very grateful that I found it.

    Now if only I had some cash to buy CNQ……..

    1. Matt

      Wow, thanks for telling us your story, James. Hard data is only so helpful; stories are much more powerful. It’s so interesting and instructive to hear yours. The high points for me are hearing how you invested right before the crash in early 2020, but had the discipline to hold on – great work. It’s also really interesting to hear how you are using leverage and your thoughts on what interest-coverage rate is acceptable for you.

      In addition to this comment, I also very much appreciate your generous donation to the site – thanks!

  12. Chad

    I think the discussion here is great, and the concept of continuing to hold BTSX stocks that are ‘out’ of the list for the next year is sound for sure. But to play devil’s advocate, I would throw out the case to sell and buy more rigorously/strictly. I am not saying it is wrong to hold on to those companies you are confident with…but for me, I absolutely LOVE that BTSX tells you WHEN to sell. Those that have been investing for a while know that the buying part is easy…selling can be much harder. And that’s why I really like to sell when BTSX tells me to. Much more often than not, I am selling at a profit because the company had a solid capital gain and thus the yield has dropped. Cash in the profits…and then push that new (and more) money into the new ones on the list, again which have I have been TOLD to buy – no subjectivity, no emotions….the true benefit of BTSX.
    Another reason I don’t generally hold on to BTSX stocks is because, like Matt, I like to hold other companies that are dividend growth stocks, and/or are from other markets. Some are Canadian such as NTR and FTT, many others are in the US market which has much more consumer discretionary options that are also often div growth stocks (i.e. SBUX). I also have started dabbling with Dogs of the Dow, and additionally want some (although it’s small) exposure internationally as well. I am a firm believer in Warren Buffet’s belief that while being diversified is important, you can be di-worse-ified by owing too many stocks. With my other investments, holding on to BTSX I find isn’t necessary, and I lose out on my first point of usually selling at a profit and then reinvesting in the new ones. I just think that deciding each year to hold or not….you’re messing with your emotions and that sort of goes against the purpose of BTSX.
    Anyways….just want to throw that out there, I think Matt is right that you can use it as a tool in any way that makes you comfortable, and build what David Stanley envisioned (a portfolio of strong, Canadian dividend paying companies), but I do think there is a case to be strict with it and have success. End of the day – that 34 year record of of beating the TSX is based on the hard-line route…so I’m going to follow the numbers.

    1. Matt

      This is a well-thought-out and nicely put comment, Chad. I’ve been thinking a lot about these very issues. You are absolutely right that there is an enormous behavioural benefit to adopting a system that tells you when to buy and when to sell. And the track record of performance speaks for itself. On the other hand, there may also be a behavioural advantage to avoiding stocks that you’re not comfortable holding and may be tempted to sell in a downturn. Two opposing tactics to address a common enemy: ourselves.

      You’ve explained the case for sticking to the portfolio very well – thanks for that. If readers are going to “follow the numbers”, as you put it, I would just like them to be fully aware of the risks inherent in that approach. Triggering of taxable events – if held in non-registered accounts, lack of diversification, possibly increased risk of dividend cuts, to name a few.

      Thanks again for the excellent comment. It really adds to the discussion.

  13. Ray

    Hello Matt,

    Thank you for your posts!

    I’ve recently bought all the stocks on the list.

    If I have new money to invest come January 2023, I will buy any “new” stocks that would come on the list, but do you normally buy more shares to your existing stocks even if their prices have gone up (resulting in averaging up)?

    I read in one of your other posts that you might add more money to a stock if the price has gone down, but I’m wondering what to do (happy problem) if all the stocks on the list have gone up, if I should “average up”?

    Thank you!

    1. Matt

      Hi Ray – I sit down annually and analyze our investment situation, rebalancing, etc. Investments are like soap – the more you handle them, the smaller they tend to get 😉 For me, new cash in the meantime usually gets put into broad-based index funds. But, yes, if my holdings were more or less balanced appropriately, I wouldn’t hesitate to add to all of them. I have learned that, for me, this is far better than sitting on cash.

      1. Jill

        Hi Matt,
        I’m wondering if you would recommend putting all 10 of the BTSX stocks in a tfsa at equal $ amounts or putting half in a tfsa and the other half in an rrsp. I have $60,000 room in my tfsa and lots of rrsp room. I’m wondering what your opinion is on the number of stocks one should hold in a tfsa. I don’t want to hold too many as I want my stocks to drip but I also see the importance of some diversification. Does the BTSX strategy recommend which account these stocks should be held in?

        1. Matt

          Hi Jill, I’m sorry but to answer most of your questions I would need to know a lot more about your financial situation so that I could make specific recommendations. Feel free to email me if you would like to consider that path.

          In general, however, I think it’s fine to have some BTSX stocks in a TFSA and some in an RRSP – I do.

          “Does the BTSX strategy recommend which account these stocks should be held in?” – No. The results are independent of account type and don’t take into account taxation.

  14. Pat

    Newcomer to this strategy… been visiting for a while, but about to try it for the first time. My question is on timing… in theory, I guess as long as you are consistent with the date you choose each year, the timing of when you choose to invest, or rebalance, etc.,… is irrelevant. I mean to say, if I decide that end of January each year is when I’m going to look back into this portfolio, and make necessary changes, that’s fine, right? It doesn’t have to be end of the calendar year?

    1. Matt

      You are correct. Welcome to our little community 🙂

  15. LeoK

    Hi, I am a new here and just added a BTSX component to my index investing in my registered accounts.
    I was interested to see you use January but that you are not strict about that. I was thinking along the lines of when would be the most advantageous time in respects to not interfering with dividends… I had thought the second week of April would be a good time. But then maybe I’m over thinking it and making it more complicated than it needs to be?