By Dale Roberts, cutthecrapinvesting
Special to the Financial Independence Hub
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.
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 2% annual or more. And as always, past performance does not guarantee future returns.
For the bulk of my Canadian contingent I hold 7 stocks.
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).
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.
We hold our cash with EQ Bank.
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.
The performance update
Here’s the Canadian wide moat 7 from 2014 vs the TSX Composite. I slightly overweight to the telcos and banks. For demonstration purposes the portfolio is not rebalanced. When reinvesting I usually throw the money at the most beaten-up stock. That would be a reinvestment idea that seeks value and greater income, the general approach of the Beat The TSX Portfolio.
Annualized returns and volatility
The Canadian Wide Moat 7 has delivered greater total returns and with less volatility and drawdowns in corrections.
And of course the portfolio dividend income is more than impressive. I did not create portfolio exclusively based on the generous and growing income, but it is a wonderful by-product. The following is based on a hypothetical $10,000 portfolio start amount. The starting yield is above 4%, growing towards a 9% yield based on the 2014 start date.
In the above, the dividends are reinvested. For example, the Telus dividend is reinvested in Telus. While I will take a total return approach for retirement funding, the generous portfolio income contribution will add a dimension that will help reduce the sequence of returns risk.
The Canadian wider moat portfolio
I know the concentrated portfolio can face criticism (rightly or wrongly). Certainly, don’t try this at home based on what this guy does. Given the concentration risk I did expand the wide moat list for readers on Seeking Alpha. I had offered up the Canadian railways and grocers. That is a nice combo of industrials and more defensive consumer staples.
That might mean adding Loblaws, Metro and Empire, plus CN Rail and CP Rail.
Related post on Million Dollar Journey: Investing in Canadian Railways.
We see those two sub sectors greatly add to the potential performance. I had suggested those stocks a few years ago. Yes, I wish I had ‘eaten my own cookin’ as they say.
Here’s the wider moat portfolio performance in equal-weight fashion.
That is an incredible beat, with perhaps even more potential than the Beat The TSX Portfolio approach.
Two stock picks
In the past I had also offered two businesses that have successful, repeatable and expandable business models. I suggested that readers take a look at Alimentation Couch-Tarde and Brookfield Asset Management.
Those companies have been wonderful performers. Even recently (as a tag team) the BAM / Couche-Tard combo would have offered a beat and portfolio boost – from 2019 and 2018.
I am more than pleased with the performance of the Canadian Wide Moat Portfolio. I will consider adding the rails and grocers in a rebalancing effort. There is also the option to build positions with the ongoing portfolio income.
Thanks for reading. As always, do your own homework with respect to any investment decisions. Ensure that you understand all tax implications.
You might consider contacting a fee-for-service financial planner. That can be a wise move and investment when you’re in the midst of the wealth building process, and before you start the retirement decumulation phase.
Must read …
And while I use individual stocks in concert with ETFs, there is certainly more than one way to build wealth over time. You might consider building your own ETF portfolio, going the asset allocation ETF route, or teaming up with a Canadian Robo Advisor.
We’ll see you in the comment section.
And for the record, for my wife’s accounts we hold the Vanguard High Dividend ETF – VDY and the TSX 60 – XIU. She is not exposed (directly) to this concentration ‘risk’.
Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dale’s site on July 31, 2021 and is republished on the Hub with his permission.