Cut the Crap Investing

Building the Canadian blue chip stock portfolio.

Dale Roberts

The good news is that it is easy to build a very good Canadian blue chip stock portfolio. In fact if you buy enough of ’em and exhibit very good behaviour (buy and hold and add) you will likely beat the TSX Composite over time. Well, if history repeats you’ll thrash the TSX. You can also shape the Canadian blue chip portfolio to be more defensive; that is to say a lower volatility model. There is also the option to add an additional layer of inflation protection. That would lead to a low volatility all-weather portfolio. All weather means that it’s ready for any economic environment, even an energy-crisis-inspired inflation shock. I’m not suggesting that a shock is on its way, no one knows how this plays out.

As always the following is not advice. This post contains ideas for consideration as you build and manage your investment portfolios.

Where are those blue chips?

Here’s a previous look at Canadian stock portfolios. That post offered the key chart thanks to Norm Rothery and the Globe & Mail …

Blue chip (large stocks) wins but you can historically do even better if you slant to the defensive sectors and low volatility.

In Canada, a blue chip portfolio will typically include financials, broader utilities that includes pipelines and telcos, the railways and consumer staples.

Here’s a quick AI-generated overview.

Key Canadian Blue Chip Stock Sectors and Examples

Many successful Canadian investors found the success of the Canadian blue chip portfolio by subscribing to the Connolly Report newsletter. As Rob Carrick reported the newsletter was closed in 2018. (sub required).

Here’s a list of stocks Mr. Connolly was looking at in 2018. Look familiar?

Check out those sectors, and stocks. The same boring, beat the market stuff. The secret sauce is not the dividend growth, it’s the sectors. It’s the blue-chipness 😉

Remember – Dividends feel good but do not contribute to wealth creation.

Dividends can certainly send signals though, and help us find certain kinds of companies. The dividends can lead us to certain sectors. The dividends can lead us to the land of blue chip.

Canadian Wide Moat

In the Canadian blue chip portfolio the companies are all members of an oligopoly group. A few companies control a whole sector or sub sector. There is no competition. Here’s a wide moat portfolio that I have offered in the past.

Financials / Utilities / Grocers / Railways

You could buy all of the 6 big banks, or 4-5 of your ‘favourites’. You can cast an even wider net and own the financials index (XFN-T) that includes the Canadian insurers and a few other specialty financials. You’d be in the area of 20 stocks to create that Canadian wide moat or Canadian blue chip portfolio.

Here’s the top ten of XFN-T. You’d also look to Power Corp and Intact.

The Essentials Portfolio

Another way to frame it, is that you are buying essentials when you create your blue chip portfolio.

The blazing simple portfolio shines in a Canadian’s TFSA.

He identified the companies in the year 2000 and it formed the core of the retirement investments for he and his wife. The cumulative 10-year total return on these stocks to 2010 was 305%, greatly outpacing the 72% for the S&P/TSX composite index.

Here’s that portfolio at the time …

Canadian National Railway (CN-T), Canadian Pacific Railway (CNR-T), Enbridge (ENB-T), TransCanada Pipelines, now TC Energy, (TRP-T), Royal Bank of Canada (RBC-T), TD Bank (TD-T), Bank of Nova Scotia (BNS-T), Canadian Utilities (CU-T), Fortis (FTS-T) and Emera (EMA-T).

It’s railways, financials and utilities. It was a case of boring and staple blue chips beating the crap out of the broader market. That should be of no surprise.

When the beat (doesn’t) go on

Let’s not forget that famous disclosure: past performance does not guarantee future returns.

Why did BMO’s Low Volatility ETF it stop outperforming?

All of the real life examples and studies occurred during a mostly low-inflation, disinflationary environment. Things have changed in the 2020s. We’re now potentially in the middle of the second inflationary period, thanks to the war in Iran.

I’ve long put forth the fact that gold makes the balanced portfolio better. I like the idea of retirees and near-retirees holding a dedicated basket of inflation fighters.

You can look to the Purpose Real Asset ETF (PRA-T) for a one-stop-shop basket of inflation fighters.

The blue chip all weather portfolio

I’ve shared the (incredible) recent performance of my wife’s Canadian Dollar RRSP. It holds those blue chip wide moat stocks and some dedicated inflation fighters by way of pipelines and oil and gas stocks. Pipes can do double duty as defensive and the ability to combat inflation. Oil and gas stocks are known as the most reliable stocks for fighting inflation.

It has been an incredible mix as we have faced the double threat of stock market declines and inflation. It’s ready for both.

Here’s the portfolio over the last 6 months. The Canadian RRSP portfolio is in racing green, the TSX Composite in blue, the S&P 500 in red. All in Canadian Dollars.

We see the portfolio going up when the markets go down. In weeks of greater inflation concerns and energy price spikes the portfolio surges. It likes inflation. We appear to have no inflation or energy shock risk. That was the plan.

Many followers on Twitter and Cut The Crap Investing have asked to see the portfolio with current weightings. Here ya go …

Yes it has some stinky bonds in the mix, and I use ETFs to cover off the greater utilities sector and the consumer staples. Also keep in mind that HUTS applies 25% leverage.

Check out the – Playing defense with Canadian utilities stocks and ETFs. You can own the HUTS greater utilities sector stuff without the leverage.

Canadian stocks within a global portfolio

We do have to beware of that Canadian home bias. Whether you use ETFs or individual stocks the Canadian allocation should be within a global portfolio. In 2019 I suggested you might …

Say goodbye to your Canadian home bias.

You can look to the Canadian Asset Allocation ETF page and these wonderful global portfolios for sensible geographic allocation ideas.

I’ve offered ideas on the ETF model portfolio page. Not advice, but given the expensive nature of U.S. stocks I’ve suggested for a couple of years that we might consider a near even mix of Canada / US / International.

We should always create a portfolio that aligns with our goals, time horizon and risk tolerance. Be sure to have a master financial plan.

In retirement you’ll need to run a retirement cash flow calculator that makes your life plan a reality. MayRetire has become our go-to calculator at Retirement Club. We do a fresh real-life cash flow evaluation each week.

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