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.
(updated August 24, 2022) 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% annually 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.
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.
We hold our cash with EQ Bank.
The performance update to August 2022
Here’s the Canadian wide moat 7 from 2014 vs the TSX Composite, to the end of July 2022. I slightly overweight to the telcos and banks. The portfolio for demonstration purposes is rebalanced every year. When reinvesting I usually throw money at the most beaten-up stock. That would be a reinvestment strategy that seeks value and greater income, the general approach of the Beat The TSX Portfolio.
2021 was a very good year for the wide moat portfolio. It beat the TSX, but did underperform the Beat The TSX Portfolio model and Vanguard’s High Dividend ETF (VDY). The outperformance of the Wide Moat 7, over the market, is accelerating in 2022.
In 2022 the Canadian Wide Moat 7 is up 1.14%. The TSX Composite is down 5.56%. For the record, the Vanguard High Dividend (VDY) is up 2% in 2022 to the end of July.
Annualized returns and volatility
The Canadian Wide Moat 7 has delivered greater total returns and with less volatility and less drawdowns in corrections. The market beat is somewhat consistent with the Beat The TSX Portfolio beat of over 2% per year.
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 10% yield (on cost) 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. I am in the semi-retirement stage.
Performance update to the end of May 2022
In this chart I begin with the inception date of the Vanguard High Yield VDY, 2013. We see the Canadian Wide Moat 7 vs VDY and the TSX Composite – XIC.
The Wide Moat stocks have outpeformed for the full period, but that is thanks mostly to better returns out of the gate. The outperformance is also aided by lesser drawdowns in market corrections. We see that both the Wide Moat approach and VDY have beat the market, with ease.
Wide Moats with an energy kick
I also hold Canadian energy stocks in the mix. That energy allocation is near 10%. Here’s what it looks like over the last year with that energy kicker. The following table looks at from January of 2021 to the end of July 2022.
I recently moved to an energy dividend approach. I sold the ETFs that delivered wonderful total returns and moved the profits to individual energy stocks that pay dividends. This could potentially be the greatest source of dividend growth in the Canadian market. Of course, a recession could spoil those plans.
So far the energy dividends have been increasing at a tremendous pace.
Others hold the opinion that oil is recession proof. He makes a convincing argument.
The Canadian wider moat portfolio
I know the concentrated portfolio can face criticism (rightly or wrongly). Certainly, don’t try this at home based 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 and Utilities. You might even buy the BMO Utilities sector ETF.
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. My ‘excuse’ is that I use U.S. stocks for added growth potential. And yes, that is a poor excuse.
Here’s the wider (more) moat portfolio performance in equal-weight fashion. I have added the two picks as referenced below this chart.
That is an incredible beat, with perhaps even more potential than the Beat The TSX Portfolio approach, and the Connolly Report returns. The Canadian Wider Moat Portfolio beats VDY by 3% annual. The CWMP beats the TSX Composite by 5.4% annual. Wow.
And of course this is a good time to remind you that past performance does not guarantee future returns.
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. It just gets crazier and crazier.
Once again, I wish I ate my own cooking. Those two picks doubled the rate of return of the Wide Moat 7 over the last 5 years. We see the picks vs the grocers and railways, below.
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 …
Defined benefit pension planning. Bad advice could cost you your retirement.
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.
Dale Roberts is the owner operator of the Cut The Crap Investing blog, and a columnist for MoneySense. This blog originally appeared on Cut the Crap Investing on July 31, 2022 and is republished on the Hub with permission.