Canadian Robo Advisors – The Tangerine Big Juicy Dividend Edition.

I kicked off my Canadian Robo Advisor series with a look at the first robo advisor in Canada that is also the largest by assets – and that’s the offering from Tangerine by way of the Tangerine Portfolios.

Tangerine offers 4 core portfolios that replicate the large cap (large company) stock markets in Canada, the US, and International. Those portfolios are offered at 4 risk levels from the more conservative Balanced Income Portfolio (70% bonds) to the most aggressive Equity Growth Portfolio (all stocks). The risk is managed by a core Canadian bond component. One might say that these are ‘plain vanilla’ index based offerings. I would offer that they are “simple but very effective”.

Tangerine Investments has an outlier Smart Beta portfolio – The Tangerine Dividend Portfolio. Given that the Dividend Portfolio is smart beta, it will start with the core broad stock market index and then apply filters and criteria to narrow down the search for specific kinds of companies that might (potentially) deliver better returns with less risk or volatility.

The Tangerine Dividend Portfolio replicates the MSCI High Dividend Yield Indices. To make it into those indices, a company must have increased its dividend over a 5 year period. The indices also apply financial filters seeking greater financial health and dividend sustainability. Oh ya, and those dividends have to be big and juicy. The dividends will be at least 30% bigger than the ‘parent’ stock market average.

If you’re investing on a regular schedule with a PAC (Pre Authorized Contribution), you will have a dividend income machine that looks like this …

Big Dividends + Growing Dividends + New Monies = Triple Compounding

We know that compounding is a powerful force. Triple compounding? Ya, that sounds more than attractive. That makes it sound like that income is going to get out of control – in a good way. Of course that dividend income is not just going to sit around in the portfolio collecting dust. The portfolio managers will use those dividends to buy more shares of the companies that you own. On your behalf the portfolio managers (State Street) are using the companies’ dividends to increase your ownership in those same companies. You take ‘their monies’ to increase ‘your ownership’.

In the land of dividend and dividend growth investing the proponents of that style will chirp …

A hen for her eggs. A cow for her milk. A company for the dividend.

DividendShutterstock

Dividend investors are typically quite committed to the approach, and they will also offer …

You can’t fake a dividend.

Well, at least you can’t fake a dividend for too long. And that brings us to the core of the high dividend and dividend growth investing approach or model. It’s not just about the physical cash dividends that are filling your portfolio on a weekly or monthly basis, it’s about the kinds of companies that can be found by way of that big dividend and meaningful dividend growth history. To pay out big dividends, the companies need big profits and cash flow. To pay out dividends that increase over a 5, 10, 20, 30-year period you need increasing profits over those time periods. Dividends can find profitability and value. I like to write that the dividends and the dividend growth history are a divining rod that finds certain kinds of companies. And it can find very successful companies with generous rates of profitability and long-term business success. As always past performance does not guarantee future success, but this style of investing is trying to tilt the odds in your favour. And once again, the financial filters are attempting to stack those odds to an even greater degree.

This style of investing has demonstrated success in the past. The MSCI indices that the Tangerine Portfolio replicates have a history of wonderful market beating returns with lesser risk. As I wrote in a Seeking Alpha article, Those Big Juicy Dividends Have Beat The Market In Canada, US and International. Once again, past performance does not guarantee future returns.

Here’s the recent performance for the Canadian component from the MSCI index fund fact sheet.

High Dividend Canada MSCI

Canada High Yield Chart MSCI

The outperformance over the broad parent market index is meaningful over a ten-year period that will include the last recession. The outperformance is also significant from 1998, that period will include the last two major market corrections of 2000-2003 and 2008-2009.

While the Tangerine Portfolios were launched in 2016, the MSCI indices have been tracked for quite some time. Tangerine was simply the first to make these indices ‘investable’ in Canada. BlackRock Canada followed up with ETF versions of the 3 indices for those who seek to create their own ETF Portfolio.

And back to that ‘profitability’ diving rod. Here’s the P/E ratio or price to earnings ratio for the High Dividend approach compared to the total stock market parent index.

You’re buying companies that will currently make you ‘more monies’ with the high dividend approach. The index constituents are making more monies and putting more monies in your portfolio pocket. We see the dividend yield at a juicy 4.66%. In the Fundamentals chart (below) the top line is the High Yield Index, the line below is for the parent broad market index.

Keep in mind that fees will eat into your profits and dividends. The Tangerine Portfolios all have a Management Fee MER of 1.07%. Of course that is very reasonable in the Canadian mutual fund landscape as Canadians pay the highest fees in the world with an average at 2.2%. And given that the Tangerine Dividend Portfolio is a mutual fund, there are no transaction costs. 

MSCI Canada Fundamentals

Here’s a further explanation of the Price To Earnings Ratio (P/E) and earnings yield. The lower the P/E the greater the earnings yield (aka how much the company or group of companies is earning for you).

If Stock A has a P/E of 20 it will have an earnings yield of 5%.

If Stock B has a P/E of 10, it will have an earnings yield of 10%.

The big juicy dividend payers do not require the growth potential of an Apple, Amazon or Google. They typically are more mature companies that have entrenched and generous current earnings; as investors we simply buy or own greater current profits and those big dividends. Back to the farm – we’re owning more productive cows and hens.

What kind of cows and hens? Here’s the top 10 holdings of the Canadian Index.

MSCI Canada Top Holdings

There’s incredible concentration in Financials (banks) and Utilities (energy and pipelines and telco’s).

The Tangerine Dividend Portfolio is 50% Canadian to take advantage of the Dividend Tax Credit. Qualified Canadians Dividends can receive preferential tax treatment compared to other types of income. This can help investors who have monies in a taxable environment.

The target asset allocation for the Dividend Portfolio is 50% Canada, 25% US and 25% International.

Now, should you bet the farm on the Tangerine Dividend Portfolio? That’s a personal decision. It might take some perseverance as with any investment strategy. In its brief history The Dividend Portfolio has actually underperformed the other all-stock Tangerine Portfolio – The Equity Growth Portfolio. Companies with greater growth and growth prospects (Equity Growth Portfolio) are outperforming companies with more current earnings and bigger dividends (Dividend Growth Portfolio). The Apples and Googles and Facebooks and Amazons continue to rule the day.

The fact that The Dividend Portfolio is 50% Canadian will also affect the returns comparison. The US markets have outperformed the Canadian and International markets over the last several years. I would put more weight on the longer term charts shown in this blog. Investing strategies can take a while to ‘do their thing’. If we have a long-term time horizon, we should focus on the long term prospects, not short-term performance.

Keep in mind that the Tangerine Dividend Portfolio is an all-equity growth portfolio and is only suitable as a longer term investment. That suitable time frame would begin at 6-9 years. It’s a Medium Risk portfolio due to the potential that the High Dividend approach might find lesser volatility in a market correction compared to a broad market portfolio. The Tangerine Equity Growth portfolio is Medium-High risk.

Investors might choose to use the Dividend Portfolio as their equity investment. To manage the risks of your overall investment mix, you might use the Dividend Portfolio in concert with one of the Tangerine Balanced Portfolios that include a bond component.

If you have any questions on the risks and portfolio building, please send a note to cutthecrapinvesting@gmail.com or call one of the advisors at Tangerine Investments at 1-877-464-5678, Monday to Friday 8 am to 8 pm Eastern Time.

Thanks for reading. Happy Big Juicy Dividend investing.

While I do not accept monies for feature blogs, please click here for more about Dale and ‘how I might get paid’ disclosures.

2 thoughts

  1. Wow Dale ,you really know how to promote “The Tangerine . Investment”thing . It’s way too complicated for your eighty year old Mom to digest though ! Yikes, that sounds soooo old !

    Well ,it’s time for me and MoMo to hit the sack . Hope all is good with you guys and you are now enjoying the cooler weather . Hope to see you all again soon ,your welcome to Pop up to Varty any time , would like to have you here with us , we miss you , Love Mom/Nana/and Mo Mo xox .

    Sent from Barb’s iPad

    >

    Like

  2. I agree that it is a bit more difficult for companies to play accounting pranks with dividends. Great read! I am a big proponent of index investing, PAC, and minimizing investment fees as well.

    Cheers,
    Enoch

    Like

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