Checking in on the Canadian wide moat portfolio.

It’s a trade off. I hold a concentrated portfolio of Canadian stocks. What I give up in greater diversification, I gain in the business strength and potential for the companies that I own to not fail. They have wide moats or exist in an oligopoly situation. For the majority of the Canadian component of our RRSP accounts (for my wife and I) we own companies in the financial, telco, grocers, utility and pipeline space. These are sectors that have historically outperformed. We can call it the Canadian Wide Moat Portfolio. We also hold Canadian oil and gas stocks at a 12-15% weighting. The Canadian contingent then takes a backseat to our U.S. stock portfolios. Always remember to check in on your Canadian home bias.

Like many Canadian investors I discovered over the years that my Canadian stocks that happen to pay very generous dividends were beating the total return performance of the market. You’ll find that market-beating event demonstrated by the Beat The TSX Portfolio. Over longer periods you’ll see that BTSX beat the TSX 60 by over 2% annual. That approach finds value and profitability in addition to business moats. Keep in mind it is the share prices that drive returns, not the dividends. I seek total return as I manage risk.

Eventually, I moved to the wide moat stock portfolio approach.

Big moats under pressure

And as always, past performance does not guarantee future returns. High dividend investors have recently experienced a period of underperformance, as many of these Canadian big dividend payers are rate-sensitive. They were under pressure in a period of rising rates. These high yielders compete with the risk-free yields available with cash, GICs and ultra short term bonds. Debt becomes more expensive putting pressure on balance sheets. Telcos have faced the most pressure due to mounting debt servicing charges and increased competition. Regulators are changing the rules for the sector. The lower yielding grocers did not face those higher rate headwinds.

Related post: Hanging up on my Bell stock.

Rate relief

From the Fall of 2023 rates have started to decline in aggressive fashion. That has provided a tailwind for some of the higher-yielding sectors, namely financials and pipelines. Telcos continue to get crushed.

Bank of Canada has cut rates and estimates call for an aggressive rate cut cycle. This is taking pressure off of rate-sensitive equities. We appear to be back in a lower inflation, disinflationary environment.

Wide Moat 7

For the bulk of my Canadian contingent I hold (held) 7 stocks.

Canadian banking.

Royal Bank of Canada, Toronto-Dominion Bank and Scotiabank.

Telco space.

Bell Canada and Telus.

Pipelines.

Canada’s two big pipelines are Enbridge and TC Energy (formerly TransCanada Pipelines).

Of course, you may (should) choose to hold more wide moat names in the financial, telco, grocer, railways and pipeline/utility space. That is the true Canadian Wide Moat Portfolio. It includes (honourary moat stocks) of Alimentation Couche-Tard, Brookfield and Waste Connections. That has been a superior approach, with much greater returns and less volatility. From the beginning of these Canadian Wide Moat Portfolio updates I have begged readers to choose the wider moat model.

In recent years I paid the price for my concentration risk. While the inflation-friendly Canadian oil and gas stocks and PRA.TO picked up some of the slack, I’ve experienced some underperformance.

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For the U.S. component there is a basket of U.S. stocks. Here’s a report of our U.S. stock portfolio on Seeking Alpha. And here’s the key chart. I will be updating the performance within a week or two.

Our U.S. portfolio has a nice long term beat, but the gap is closing as it has been more than difficult to keep up with the tech-heavy S&P over the last 2 years. Those U.S. market returns are largely driven by the Magnificent 7.

I look for stability (during any recession or major market correction) from the Canadian equity component, while many of the U.S. stocks provide the growth kicker.

Canadian wide moat update to the end of December 2024

Here’s the total return chart from Portfolio Visualizer.

As per usual we see the outperformance of the Wider Moat portfolio over the market and over BMO’s Low Volatility ETF. That Low Vol ZLB might be the best option in Canada for a Canadian core holding ETF. The Canadian Wide Moat portfolio appears to be just a little bit better. In the investment space, a little can mean a lot over a longer time period.

Here’s the Wider Moat Portfolio, with ZLB also shown.

I really like Waste Connections as a moat stock. It would have contributed to the outperformance. That said, the valuation seems very stretched in 2024. I did not add that stock to the total return evaluation.

ZLB is a Canadian stock portfolio model that is hard to beat. Take a look at BMO’s Low Volatiliy ETF – ZLB. From that post …

More on telcos

Canadian investors will know that the telcos have been getting hit hard. They do not like the higher rate environment. Plus, the regulatory environment has changed and there’s not enough growth to pick up the slack. It is now a no-growth to low-growth sector.

In early 2025 many analysts are wondering if there is very solid value in the beaten up telco sector. I have a suspicion that the sector will make the adjustments necessary to become a very slow growth but reliable (modern) utility holding. They will continue to cut staff, cut capital expenditures and will get some help from a lower rate environment. They can be very free cash flow and dividend friendly. I’m watching.

A few months ago, I sold half of my Bell Stock. The dividend is not covered by free cash flow. From that post you’ll see that I moved the proceeds to iShares U.S. Quality – XDU.TO.

I don’t mind beefing up my U.S. exposure, especially with a value tilt.

I also added to my very modest position in Hamilton’s HUTS – a leveraged utilities ETF.

Creating the VDY Plus Portfolio

In my wife’s accounts I used VDY to not expose her to my concentration risk. That ETF has beat the market by over 1% annual. Mission accomplished.

But given the fees and the size of my wife’s VDY holding, I sold the ETF to create what we can call the VDY Plus Portfolio. It has the core elements of VDY plus a wider moat slant due to the consumer staples (XST.TO) and Couche-Tard. It’s off to a nice start beating VDY.TO and the TSX Composite XIC.TO.

Observations and takeaways

Dividend paying stocks have benefited from the low inflation and disinflationary period that began in 1981. With bond yields falling for the most part, investors enjoyed very good returns from bonds and big dividend payers. Given that stocks and bonds perform well in a disinflationary environment, balanced portfolios have delivered very good returns for many decades.

It’s possible that the inflationary shock is behind us. Rates are coming down and perhaps we return to the environment we’ve mostly known from 1981. That would be my guess. But of course there is always the risk of an inflationary shock.

Wide moat stocks as bond proxies

Many Canadian retirees will use the banks, telco’s, pipelines, grocers and utilities as bond proxies to work in concert with a cash and bond allocation. As a semi-retiree I am in that camp.

Our U.S. consumer staples and healthcare stocks also help to build that defensive wall.

Defensive sectors for retirement.

As that post demonstrates, there’s nothing better than defensive sectors and wide moats.

Retirement Club

Retirement Club kicks off this month. Thanks for the wonderful response and positive feedback. The Club (monthly Zoom calls / monthly newsletter / resource hub and conversation hub) is full subscribed.

You can sign up for the waitlist, we’ll start another trip, Retirement Club2 in March or April. Use the Contact Form to contact me (Dale) and I will send you the outline and put you on the waitlist.

Together, we’ll make sure we do retirement right.

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