Beat the TSX (BTSX) for Retirement Income

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The investing concepts behind Beat the TSX (BTSX) to juice your retirement income are rather simple, but there are some considerations for any investor to ponder before going all-in.

In today’s post, we’ll highlight the Beat the TSX (BTSX) strategy, why it works, and some of the potential drawbacks of this approach so you can make an informed decision as part of your investing practices.

Let’s go!

Beat the TSX (BTSX) Backgrounder

Passionate DIY readers and investors who follow Canadian MoneySaver (we are/have been) will be instantly familiar with the name David Stanley.

David has long since made the case to be an owner of dividend growth stocks for years, as in decades, which is outlined in a great post on one of our favourite sites: DividendStrategy.ca managed my Matt Poyner.

You can read about the case for dividends, written by David on Matt’s site, in that link.

Adapted from the “Dogs Of The Dow” strategy developed by Michael O’Higgins in the early 90s, “Beating the TSX” (BTSX) boasts a long-term track record of historical outperformance relative to its benchmark back-tested to 1987.

As such, real investors, like you and me, can in fact beat-the-market over time by following this approach if you have the long-term discipline to do so.

The BTSX strategy is simple, low-cost, systematic and rules-based. It will not work otherwise.

David Stanley developed this approach to help Canadians keep more of their hard-earned money for their own investment purposes, away from greedy financial advisors who perpetuate the merits of the costly mutual fund industry.

I believe all DIY Canadian investors owe a debt of gratitude to David Stanley, for this approach but also for his work to highlight that dividend and dividend income, while just a part of total return, can matter.

How do you Beat the TSX (BTSX)?

We mentioned above, the BTSX strategy is systematic and rules-based. There are however some low-costs. But it is fairly simple to understand and maintain:

  1. Sort the TSX60 index by dividend yield. (A good ETF for that is low-cost XIU).
  2. Select the top-10 yielding stock positions but remove any former income trusts (with some exceptions) and remove any stocks that have a suspect dividend history from your top-10 list (i.e., these blue-chip companies have cut or paused their dividends in recent years). You’ll want to narrow in on selecting “TURF” stocks (telecoms, utilities, real estate investment trusts, and financials). You will avoid selecting low-yielding, high dividend growth rate stocks. We’ll come back to that point later on!
  3. Purchase these top-10 positions in equal amounts, the dollar amounts, not an equal number of shares at the beginning of the year. Hold such positions until the new year at which point you check the list of top-10 yielding blue-chip stocks on the TSX60 again. If there are any differences, you swap out positions until they match.
  4. Repeat the process annually.

The premise behind BTSX, beyond beating the TSX60 index of course, is to avoid costly mutual fund or other related investing fees – paid to financial advisors and money managers – who invest their money in products that usually underperform the market.

How has Beat the TSX (BTSX) performed?

Incredibly well.

We won’t go into all the details here, our friend’s site DividendStrategy.ca is our default source for all things BTSX including monitoring the performance of this approach over time – picking up where David Stanley kindly left off.

The results are a bit staggering, really.

From Matt:

“What this means in real terms is that $10 000 invested using the BTSX strategy 34 years ago would be worth $369,752 today. That same $10 000 invested in the benchmark index would be worth only $173,859 – a 113% difference.”

Beat the TSX (BTSX) for Retirement Income - DividendStrategy.ca

Source: DividendStrategy.ca – Beat the TSX Results page.

Why does the BTSX strategy work?

We feel a few key reasons come to mind.

  1. Low cost to implement. There is no need for trading (it takes the emotions out of investing), when there are only 10 rules-based stocks involved and purchased on a yearly basis. When you minimize portfolio churn you minimize costs, you stay invested and reap the benefits that many mutual fund managers can’t afford to do.
  2. You are purchasing large, stable, blue-chip companies that reward patient investors. The TSX60 is an index composed of the largest companies in Canada, the bluest of blue-chippers that tend to make money for shareholders year after year.
  3. You are purchasing companies at good valuations. By buying the companies with a higher yield, you are seeking value. This is because of the relationship between dividend yield and stock price. Because yield is calculated as the dividend/stock price, as the stock price declines, your yield increases. So, via BTSX, you are essentially buying shares of large stable companies when their share price is (temporarily) depressed. Also, note that the average yield of the TSX60 is roughly about 3% (see XIU ETF distributions for details) but the average yield of the BTSX strategy is usually closer to 5%. This means in real money terms, this BTSX strategy will produce almost twice the income of an index-ETF-based strategy/instead of holding XIU on its own. When you are seeking some stable companies for juicing your retirement income, this concept should not be overlooked!

What’s wrong with the BTSX strategy?

At Cashflows & Portfolios, we love owning dividend-paying stocks in our portfolios. We also own many of the BTSX stocks in our portfolios as well and have done so for many years.

However, one of the challenges/drawbacks in implementing the BTSX strategy is you do need to be rather rigid with this approach – to accept the potential, future outperformance of TSX60 returns. That means, no deviation from the plan year after year after year. In doing so, and only sticking to the top-10 TSX60 stocks, you are missing out on many other companies, low-yielding companies that offer high dividend growth, growth stocks in general, and much more. You are narrowing your pool of stocks in your portfolio, purposely and systematically. This should be a consideration for you.

Related to our first point, there is an absolute risk that BTSX will underperform the TSX60 during some investing periods. In fact, it’s bound to happen from time and time and did for the better part of 2020. So, BTSX will be subject to benchmark index underperformance from time to time and that’s a real risk that any long-term BTSX investors must live with.

Finally, BTSX might not be suitable for diversification – especially diversification (and returns) from beyond Canada’s borders. While the BTSX has handily beaten the TSX60 over time, over 30+ years, few market indexes have trumped the S&P 500 index in the U.S.

Our friends at TaxTips.ca keep a standing chart of long-term market returns. You can see that ignoring the rest of the world stocks, specifically, the U.S. stock market may be at your portfolio peril.

Beat the TSX - Historial Returns TaxTips.ca

Source: https://www.taxtips.ca/stocksandbonds/historical-investment-returns-stocks-bonds-tbills.htm

How does Cashflows & Portfolios invest – do we own BTSX stocks?

Absolutely.

We know Beating the TSX doesn’t always beat the index. We also know there is a world of stocks, literally, beyond Canada’s market to consider owning.

So, while we own many of the current 2022 edition BTSX stocks below, we do own other Canadian stocks, U.S. stocks and low-cost ETFs for extra portfolio diversification.

BTSX Stocks 2022

Source: My Own Advisor via DividendStrategy.ca

By no means is BTSX perfect, but it does offer immediate, blue-chip stock access every year to Canadian oligopolies that have large barriers to market entry. As such, you may wish to follow BTSX as one element of your portfolio construction plan. This way, BTSX becomes part of your investing plan along with using other stocks or some of the best ETFs to build wealth for growth.

Further reading: Best ETFs in Canada for Building Wealth.

Beat the TSX (BTSX) for Retirement Income Summary

We believe buying and holding Canadian dividend growth stocks has historically been a strong investment outcome for investors in their asset accumulation phase.

With many aspiring and current retirees counting on income and capital gains from their portfolio to live, throughout retirement, we also believe owning some Canadian dividend growth stocks found in the BTSX list can be worth owning. We do it ourselves. 

We also believe low-cost, broadly diversified ETFs can further give you instant international exposure, especially in growth sectors such as tech and healthcare where Canada doesn’t have many blue-chip choices.

Since 1987, thanks to David Stanley’s fine work, the BTSX strategy has handily outperformed the Canadian broad stock market. If you want to follow the BTSX strategy, you likely need to go all-in. There are no shortcuts or hybrid approaches. The BTSX approach is simple and time-tested, but we know many investors would undoubtedly struggle with just owning a portfolio of ten stocks, let alone rebalancing the portfolio every year.

As such, investors at any age need to consider the strong (and strict) rules related to the BTSX approach, to gain the complete and full benefits of BTSX returns, while balancing their tolerance for risk and a narrow selection of stocks. Unfortunately, no such ETF exists for BTSX – maybe Joe and I should create one (!) so investors are likely left with taking the best concepts of BTSX, diversifying beyond BTSX, not only to gain meaningful long-term returns but in the process avoiding only a small basket of value stocks in their portfolio.

We’ll have more information about BTSX over time on this site, so please stay tuned!

Need any help with understanding your cashflow or retirement income needs?

Developing and managing a well-diversified, investment portfolio, with or without BTSX stocks, is very likely to meet your retirement income needs. We continue to buy and hold many BTSX stocks year after year but we also own much more than that. The challenge then becomes how best to draw down the income and/or growth from your portfolio, amongst other investments.

  • Should you spend taxable dividend income first, if you have those non-registered investment accounts?
  • Do you withdraw from registered accounts (like your RRSP) before your non-registered account or TFSAs? Why?
  • How much income could your investments generate, including dividends and capital gains over time, to fund retirement? Is that enough with higher inflation?
  • What amount of taxes will your portfolio withdrawals incur?
  • When should you consider taking your workplace pension?

As DIY investors helping other DIY investors, we built Cashflows & Portfolios to help others gain answers to those questions and many more!

Knowing how to demystify the retirement income puzzle is not trivial work but it’s absolutely something we can help with – we continue to help clients every month!

If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts while living your best retirement life), we can help!

If you are interested in obtaining private projections for your financial scenario, click here to learn more about how we can help!

Thanks for your ongoing readership and for sharing this site with others – our site is growing thanks to you.

Our best,

Mark and Joe

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2 thoughts on “Beat the TSX (BTSX) for Retirement Income”

  1. Hey guys, Matt from DividendStrategy.ca here. Great primer on Beating the TSX! I just want to clarify one thing: BTSX is a tool that investors can use to help build their portfolio and doesn’t need to be followed rigidly. I would never suggest that BTSX stocks constitute ALL of one’s portfolio. The clear methodology is necessary because it allows us to track the performance year over year with consistency – the only way we can have confidence in the results.

    Personally, I’m a big fan of simple, rules-based investing. About 50% of my portfolio is BTSX stocks that I’ve bought and held over the years, but I also have dividend stocks from other sectors that have never been on BTSX and index ETFs that give me international exposure. As powerful as BTSX has been, sector and geographic diversification is important.

    Sorry to nitpick a little, but I hope this helps your readers because BTSX really is a great tool for Canadian investors!

    Reply
    • Matt, great comment 🙂

      All good with the nitpick a bit – we believe investors should consider taking the best concepts from BTSX, even holding many of those BTSX stocks, as part of their portfolio construction to deliver meaningful returns. We’re just concerned some investors might read any content and suggest to only follow BTSX and own those holdings alone – we just don’t think (despite historical returns) that would be best.

      Rules-based investing is helpful to keep emotions out of the equation. DRIPs are a form of that. So is automated savings for investment purposes. We believe anything that assists in asset accumulation that disables emotions to a degree can be beneficial.

      Thanks for your thoughtful comment and we look forward to speaking to you more about BTSX.
      CAP

      Reply

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