How to use BTSX in real life

Here’s a nugget of information about me:  I love woodworking.  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.”  I had never used a table saw.
“Okay.  Thanks.”  I went downstairs 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.  Used well, it can achieve excellent results.  Used improperly, your financial health might be in jeopardy.  But it’s not rigid or complicated.  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 it is both simple and versatile.  Read on and you’ll see.

I wish I had watched my father in law use the table saw before I went at it.  Here is how I actually use the BTSX strategy.

I buy once per year (unless there is a sale)

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.  It is not on the same day every year, but I try to do it in January.  In between, I try hard to ignore what the market is doing.

Some of the money that arrives throughout the year from earnings or dividends is used to automatically 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.

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

I don’t sell good companies

In an average year, only about three of the BTSX holdings will drop off the list to be replaced by three new companies with higher yields.  Do I always sell the the stocks that no longer appear in the portfolio?  Not at all.

Good companies that still pay excellent dividends, I will hold on to.  Generally they have fallen off this list because of increases in their stock price, rather than a decrease of their dividend.  I am still a happy owner of large stakes in Fortis (FTS), Royal Bank (RY) 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 or other egregious 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.

I don’t buy “bad” companies

When I started using the Beating the TSX strategy, I bought every stock on the list in equal parts.  This is still a very sound strategy and is the method that is used to calculate our excellent long term performance.

In the last few years, however, I will admit to taking a few liberties.  For the most part, I still buy every stock, but I buy less of stocks like Manulife (MFC) that have inconsistent dividend histories, and Shaw Communications (SJR.B) whose stock appreciation and dividend growth have been glacial. 

In past years certain stocks have appeared on the list with far more worrisome fundamentals:  short, inconsistent dividend histories and declining earnings in troubled markets.  I bought them and regretted it (ABX and IMG come to mind).  I wouldn’t buy them now.  (If companies like these appear on the list I will do my best to make sure you know about them so that you can make your own decisions)

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.

I own non-BTSX stocks

A common question we get is why companies like Interpipeline (IPL) are excluded from the BTSX portfolio even though it is listed on the TSX 60 and has a dividend yield of almost 8% (currently).  The reason is that IPL only completed it conversion to a dividend-paying corporation from an income trust in 2013.  Previous income trusts were excluded from the BTSX method by it’s past authors because of concerns around dividend stability.

Since then, however, Inter Pipeline has proven itself a stable, consistent dividend-payer.  In fact, IPL has raised it’s dividend for the past ten years in the context of growing funds from operations (FFO).  I like IPL and am happy owning it. (Perhaps it is time to officially include previous income trusts)

There are other reasons to diversify outside BTSX stocks:

  • Exposure to other sectors:  BTSX stocks tend to be concentrated in telecoms, utilities, and financials.  It makes sense to own companies that profit from consumer goods, materials, health care, etc.
  • Exposure to international markets:  Many BTSXers use the analogous method (The Dogs of the Dow) to purchase US investments.  Others use a low cost index fund like XAW for super-simple international diversification
  • Exposure to other sound investment strategies:  Beating the TSX has outperformed Canadian markets over the long term and I think it will continue to do so.  But there is a case to be made for other strategies such as dividend growth and index investing.  I own some VCN (Canadian index fund) and other companies that might have lower yields but excellent dividend growth histories.  I do not participate in irrational strategies like technical analysis or day trading.

Conclusion

I hope this article is helpful in illustrating how the BTSX strategy is used 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.

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!

9 Comments

  1. 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. 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. 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.

  2. 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. 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.

  3. 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.

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