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Beating the stock market index for 20 years and counting

When this Canadian analyst put together a blue-chip portfolio to beat the benchmark index, he didn’t forget the dividends.

Mr. David Stanley is celebrating an anniversary. Normally this would be an occasion for family and friends only. But since Mr. Stanley is holding his party in the pages of Canadian MoneySaver, we feel free to join him.

The occasion is the 20th anniversary of a portfolio this analyst put together under the name “Beating the TSX.” (Of course, it was “Beating the TSE” when he began, but we won’t quibble over a letter.)

The portfolio has lived up to its name. It has returned 14.16 cent over the past 20 years. The index has returned 11.50. A solid margin, to be sure, but in total returns Mr. Stanley’s portfolio has actually outperformed the index by more than 23 per cent.

Let’s examine this a little closer, because the way in which that total return was achieved is of critical importance to every investor.

Double-digit returns through boom and bust

Mr. Stanley launched his portfolio at the same time the Toronto Stock Exchange first created a true blue-chip index mirroring the Dow Jones, the TSE 35. When Standard & Poor’s came on the scene in 2002 and altered some of the Toronto indexes, including the 35, he switched to the Dow Jones Canada Titans 40, which represents the 40 largest and most liquid Canadian stocks.

Whichever index the “Beating the TSX” portfolio is measured against, it has maintained double-digit returns through “boom years, bust years, recessions, a technology bubble, and now a housing bubble.”

Here’s how the portfolio works. Mr. Stanley’s contains ten blue-chip, dividend-paying stocks. He holds those stocks for a year, no matter what may happen (no mid-year panic selling), then reviews them.

The portfolio’s progress has been followed regularly in the pages of Canadian MoneySaver, in the hope that it “encourages investors to build up a portfolio of safe blue-chip companies that pay out high dividends.”

DRIPs for real gains

We referred above to the 23 per cent edge this portfolio held over the index. This is no mere statistical sleight-of-hand. It comes from compounded returns, and those returns get an enormous charge from dividends, specifically, from Dividend Re-Investment Plans (DRIPs), also known as Share Purchase Plans (SPPs).

Says Mr. Stanley: “Reinvestment of these dividends through a DRIP, a benign method of forced saving, can lead to real gains.”

Using DRIPs, he continues, “it is easy to compound your dividends and attain quite high yields compared to bonds and income trusts. Investors may consider employing this strategy to enhance the fixed-income portion of their retirement portfolio.” He points out that it has the added virtue of deferring capital gains and lowering the costs associated with frequent trading.

Of the 10 stocks currently in the portfolio, no fewer than seven have DRIPs. Here are the stocks in the “Beating the TSX” portfolio, with an asterisk on those that offer DRIPs, or SPPs:

BCE Inc (TSX-BCE)*
Great-West Lifeco (TSX-GWO)
TransCanada Corp. (TSX-TRP)*
Enbridge (TSX-ENB)*
Bank of Nova Scotia (TSX-BNS)*
Royal Bank of Canada (TSX-RY)
National Bank (TSX-NA)*
Bank of Montreal (TSX-BMO)*
Teck Cominco (TSX-TCK)
Canadian Imperial Bank of Commerce (TSX-CM)*

For the record, in the portfolio’s 20th anniversary year, it rose by close to 30 per cent and beat the index by more than 10 per cent.

“During the course of the investment year, nine of the ten stocks increased their dividends,” says Mr. Stanley, “and the overall average dividend rose by 9.9%,” although this is not reflected in the year’s returns (it is the re-invested dividends that ultimately show up in the compound returns). “We obtained double-digit gains from all of our companies except National Bank, with Teck Cominco coming close to a 40 per cent increase.”

The margin of victory for Mr. Stanley’s portfolio is all the more impressive when you consider that the index has been no slouch, with its returns pushed upward by commodity-based companies.

Changing of the blue-chip guard

Pleased as he is with the success of the “Beating the TSX” portfolio, Mr. Stanley has a few salient observations on the direction of the Canadian market.

Looking at the blue chip indexes he has followed, he notes that the guard is changing. The financial and oil and gas sectors have more than doubled in the past decade, while basic materials, industrials and consumer service sectors have been cut in half.

“But the sector that really commands attention,” he says, “is consumer goods, now less than a tenth of what it was before.” Magna International is the only Canadian blue chip left in the sector as “we churn out automobiles while importing other consumer goods. Thankfully, our exports of raw materials and energy offset this sufficiently, so that we still have a healthy trade balance, unlike the U.S.”

Unfortunately, adds Mr. Stanley, “another of our big export items seems to be Canada’s manufacturing base. Ownership of eight of the 1996 TSE35 companies now resides outside this country.” More are almost certainly on the way.

The good side to all this merger and acquisition activity? It is fuelled by lots of liquidity — “money looking for a home.” And it doesn’t hurt that Canada has what the world needs now in material and energy.

In short, Canada stands to remain rich in blue-chip, dividend-paying stocks. And if we build our portfolios as carefully as Mr. Stanley has for Canadian MoneySaver, one year from now we can all have one heck of a July First celebration.