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Aug 31, 2021

Beating The TSX Is Back On Track

by Matt Poyner
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I wrote my first article about DIY investing for Canadian MoneySaver eight years ago. At that time, I’d been using BTSX to build my own portfolio of Canadian blue-chip dividend-paying stocks for a few years. Since then I’ve taken over writing BTSX updates for this magazine and started a blog (www.DividendStrategy.ca) dedicated to helping Canadian DIY investors be successful, with an emphasis on dividend investing. Whether you’re an institutional investor or a DIYer, one thing is clear: to be successful, you need to have systems in place to cope with volatility.

Case in point: 2020 was a tough year for dividend investors and those of us who use the BTSX method took a temporary beating. Fortunately, the tides have turned, and Canadian blue-chip dividend-paying stocks are back on track. In fact, as of July 1, when this article is being written, the 2021 BTSX portfolio is up 30.7% compared to 18.6% for the benchmark TSX60 index. It’s time for a BTSX mid-year update.

 

In my 2020 annual update six months ago, I had three messages for Canadian dividend investors:

  1. Don’t be blinded by short term numbers,
  2. Beating the TSX tends to shine after bad years and
  3. Dividend investors have the luxury of focusing on dividend income rather than stock prices.

Now that we’re midway through 2021, let’s see how we’re doing on these points.

1. Put short term results in perspective

Every sound investment strategy will have periods of underperformance. Everybody knows this. Fewer possess the fortitude to endure the hard times. No matter what type of investor you are, it’s likely that your resolve was tested last year.

In 2020, the BTSX portfolio posted an annual return of negative 10% and underperformed the index by 15%; no one could blame BTSX investors for indulging in a little self-doubt. I hope you read the update in the February edition of CMS, reassessed your portfolio, and stayed the course. For those who did, BTSX stocks have rewarded them handsomely.

Every single stock is up on the year so far with a total return on the portfolio (including six months worth of dividends) of 30.7%. That’s a 12.1% absolute advantage over the TSX60 benchmark’s total return.

But, as always, it’s the long term data that matters. Since the rebound in Canadian dividend-paying stocks, here is what the 1, 3, 5, 10, 20, and 30 year data looks like. (Fig. 2)

 

Once again, the BTSX method is outperforming the benchmark in every time frame. To be clear, however, BTSX has years when it underperforms. The following chart can help us manage our expectations. 2021 is at the top, 1989 is at the bottom; lines on the left indicate years when BTSX underperformed. (Fig.3)

 

Perhaps the most meaningful way to view this data for long term investors, however, is to show how $10 000 dollars would have grown over the past 32 years using BTSX versus the benchmark index.(Fig. 4)

 

As you can see, $10 000 invested in BTSX thirty-two years ago would be worth $313 975 now, versus only $165 509 for the benchmark (total returns).

2. BTSX shines after bad years

2020 was Beating the TSX’s second worst year ever. The worst? - 1999. In that year, BTSX underperformed the index by 37%. Horrible, yes, but if one had invested $100 000 using the BTSX method starting right after this horrendous performance, by now it would have grown to $915 000 vs. only $485 000 if one had chosen an index fund. Beating the TSX has an incredible track record of bouncing back after bad years. (Fig. 5)

 

I wrote this six months ago, but it bears repeating: A good investment plan is not one without periods of underperformance, but one that is durable enough to recover and outperform. BTSX fits the bill.

3. Dividend investors have the luxury of ignoring stock prices

Regardless of whether stock prices have gone up or down in any given year, dividend investors enjoy a special luxury: we can ignore the noise and focus on dividend income. There’s little temptation to panic-sell when big stable dividends keep flowing.

New BTSX investors started 2021 with a very generous 6.13% yield. The cherry on top is that, as usual, several of these quality companies have raised their dividends even further in the last six months. This means that if you’re lucky enough to have $1 000 000 invested in the portfolio, your annual dividend income has grown from $61 300 to $62 600 - an incredible rate of return to start, plus an extra $1300 just for sitting tight. Are bond investors enjoying that kind of inflation protection? (Fig. 6)

 

Conclusions

Beating the TSX doesn’t always beat the index, but it has shown incredible resilience to reward investors who keep a level head during tough times. Volatility can spawn bad habits just as easily as it can bestow valuable lessons. Here are three take-aways from the turbulence of late:

  1. Have a plan and stick to it; BTSX bounces back.
  2. Ignoring short term volatility is both our greatest challenge and our greatest advantage.
  3. Focus on dividend income, not stock prices.

Matt Poyner is a DIY investor who has been using the BTSX strategy for over ten years to achieve financial independence. Find him online at www.dividendstrategy.ca.