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 my RRSP account I own 7 companies in the banking, telco and pipeline space. I like to call it the Canadian wide moat portfolio. I also hold oil and gas stocks at a 12% weighting.
Like many Canadian investors I discovered over the years that my Canadian stocks that pay very generous dividends were beating the performance of the market. You’ll find that market-beating event demonstrated by the Beat The TSX Portfolio. Eventually, I moved to the stock portfolio approach.
Over longer periods you’ll see that BTSX beat the TSX 60 by over 2% annual. And as always, past performance does not guarantee future returns. High dividend investors are currently experiencing a period of underperformance, as many of these Canadian big dividend payers are rate-sensitive. They are under pressure in a period of rising rates. These high yielders now compete with the risk-free yields available with cash, GICs and ultra short term bonds. Debt becomes more expensive putting pressure on balance sheets.
For the bulk of my Canadian contingent I hold 7 stocks. Of course, you my choose to hold more names in the financial, telco and pipeline/utility space. For greater diversification and total return potential – please look to the WIDER Moat Portfolio, shown below. That has been a superior approach, with much greater returns and less volatility.
Royal Bank of Canada, Toronto-Dominion Bank and Scotiabank.
Bell Canada and Telus.
Canada’s two big pipelines are Enbridge and TC Energy (formerly TransCanada Pipelines).
Must Read: Building the defensive Canadian big dividend portfolio.
My followers on Seeking Alpha or Cut The Crap Investing readers will know that I also own Canadian energy producers, gold stocks and gold price ETFs (holding gold) and the all-in-one real asset ETF from Purpose. I also own Canadian bonds and bitcoin.
It’s all part of the all-weather portfolio model.
For the U.S. component there is a basket of U.S. stocks. Here’s an update of our U.S. stock portfolio. That portfolio continues to provide impressive market-beating performance.
Performance to the end of December 2023
We see that the Wide Moat 7 portfolio has moved to a level of underperformance from 2013, the Vanguard VDY inception date. The Wide Moat 7 had a flat 2023, delivering dividends but up less than 0.5% on the total return front.
The Canadian high dividend Vanguard VDY ETF has maintained its outperformance over the TSX Composite for the period (see below). The telcos and Enbridge took it on the chin in 2023.
VDY has outperformed from inception in 2013, by almost 1% annual.
In my wife’s accounts I have used VDY to not expose her to my concentration risk. She also has some exposure to the TSX 60 (XIU/TSX).
We can see that VDY benefited from the energy exposure (oil and gas stocks) that responded to the inflation shock.
Canadian Wide Moat 7 plus oil and gas
Here’s the wide moat stocks with the oil and gas exposure that I hold. This has helped my Canadian portfolio considerably from 2021. It was in late 2020 when I put Canadian oil and gas stocks on the table for readers. I built my positions in early 2021.
To the Wide Moat stocks I’ve added 10% exposure to oil and gas stocks – iShares (XEG/TSX). The following chart is from January of 2021 to December 2023.
While the oil and gas exposure has covered for the recent underperfomance of the Wide Moat 7, that’s not to discount the truth – that the wide moat 7 approach is in a period of underperformance. In the end I want and will benefit from the total returns. Shares will be sold to generate retirement income.
That said, I do also rely on the U.S. exposure for the total return growth. And that U.S. mix of stocks has outperformed the S&P 500.
The Canadian Wider Moat Portfolio
I have long pleaded with readers to consider the wider moat approach that includes the rails, grocers and long-time picks of Alimentation Couche-Tard and Brookfield – honourary wide moat stocks. Here’ the performance of the wider moat, but not including the picks. The Canadian Wider Moat Portfolio outperforms by almost 2.5% annual.
The outperformance is considerable. To my mind, the wider moat approach is tough to beat for a Canadian stock portfolio. Here’s the mix. VDY is shown as a benchmark.
We see that the outperformance is thanks to Canada’s two top banks, plus the railways and grocers.
And here’s the performance of the tw0 picks in equal weight fashion. This chart is run from 2013 to allow for a period over 10 years. The picks have offered drastic outperformance over 1-year, 3-year, 5-year and 10-year time frames.
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 have 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.
If we stay in a ‘higher rate’ environment it is certainly possible that big dividend payers will continue to face these recent headwinds. That shows the importance of diversification. If sticky inflation remains a problem, it may be important to hold dedicated inflation fighting assets. That is the theme or premise of an all-weather portfolio.
It should be no surprise that the inflation-friendly oil and gas stocks are covering for the high dividend approach. Those oil and gas stocks are greatly reducing debt and are cash flow rich.
If rates fall that will likely provide a boost to the big Canadian dividend sector.
Dividends as bond proxies
Many Canadian retirees will use the banks, telco’s, pipelines and utilities as bond replacements, or to work in concert with a cash and bond allocation. As a semi-retiree I am in that camp.
On that count the Wide Moat 7 has outperformed Vanguard VDY. In the chart below, the dividends are not reinvested. This will reflect the reality for a retiree that is harvesting the dividends for retirement spending.
With a hypothetical $10,000 starting portfolio value, $400 of portfolio income represents a starting 4% yield.
We can see the incredible dividend growth. That is greatly eclipsed by the astronomical dividend growth in the oil and gas sector. It offered a double in 2022 (over 2021) with more generous dividend growth in 2023.
But once again, total return will become important when the time comes to sell shares to create retirement income. No one with a proper financial and cash flow plan will live off of the dividends for an extended period.
Check in with friends at Cashflows & Portfolios for that must-have retirement cash flow plan.
It’s not wise to concentrate exclusively on dividend growth in the accumulation stage as well. Separate the accumulation and decumulation stages. Remember, more money creates or buys more income. 🙂
As Bob at Tawcan recently wrote – it’s total return for the win.
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Our savings accounts
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