When Beat the TSX (BTSX) works and when it doesn’t!

In previous posts on our site, we highlighted the investing concepts behind Beat the TSX (BTSX) to juice your retirement income.

In today’s post, we’ll highlight the Beat the TSX (BTSX) strategy, when it works, when it doesn’t, and just as importantly chat with a passionate, early-retiree that not only follows this strategy but writes about it extensively as a subject matter expert!

Let’s get into today’s updated post about Beat the TSX (BTSX), when it works and when it doesn’t to help you make some informed investing decisions.

Beat the TSX (BTSX) Backgrounder

In our last post on Beat the TSX (BTSX), we highlighted what the BTSX strategy is, including a champion of this investment strategy in the personal finance and investing blogosphere, Matt Poyner.

If you missed that post, click the link above and let us know your thoughts/comments on the overall BTSX approach.

With so many passionate readers who are approaching retirement, semi-retirement or some form of work on their own terms, we thought it would be great to talk to someone who practices what he preaches when it comes to BTSX.

Enter in Matt Poyner, owner, author and manager of DividendStrategy.ca – a site dedicated to BTSX investing updates and all things personal finance.

We’ve known about Matt’s site for some time, and at Cashflows & Portfolios, we’ve been fans of buying and holding BTSX stocks for well over a decade now. There are however some considerations to this approach, there are drawbacks to consider, and so we wanted to reach out to Matt who has really carried the BTSX torch per se to manage, monitor and share updates related to this investment strategy over time.

Beat the TSX (BTSX) – Dividend Strategy

Welcome to our site, Matt – great to have you!

Thanks for having me.  It’s always fun to chat with fellow Canadian investors and you’ve both been blogging in this space for longer than I have, so I’m honoured to be here.

Good stuff, Matt. Matt, we’ve followed BTSX stocks for decades, but some readers might not yet know about your fine work in being a go-to site for this approach for Canadians.

Can you tell readers a bit about yourself, your background, your investing journey but just as importantly, a bit about what you write about at Dividend Strategy for our readership?

Sure. I’m a physician by training and worked as a full-time emergency physician for 13 years. As the years went by, however, I could tell that it wouldn’t be a sustainable career for me. Fortunately, I’ve also been interested in personal finance and investing for decades. I didn’t know how important that would become!

Early on in my career, I came upon David Stanley’s Beating the TSX articles and the simple, data-driven methodology really appealed to me. Dividend investing became the backbone of our family’s portfolio. I even started writing about DIY investing for the same magazine that David Stanley wrote for, Canadian Moneysaver, and was ultimately asked to take on the Beating the TSX articles themselves, which was a great honour.

I couldn’t improve upon David’s diligent tracking or the method’s performance, but I realized that I could make Beating the TSX more accessible. That’s when I started DividendStrategy.ca, a place where I make all things BTSX available to everyone all the time for free, and I also get to write about many other topics that I find interesting and useful as a DIY investor.

In contrast to many professions where more knowledge, skill, and time on task equates to better performance, investing is not like that. Generating wealth has almost nothing to do with how smart you are and everything to do with your behaviour. I find this both appealing and empowering: a few good habits and a simple investment plan will serve most people extremely well.

(Cashflows & Portfolios to Matt: we agree!)

In our case, a good income combined with a relatively high savings rate (about 30%) and a portfolio largely based on BTSX stocks allowed our family to achieve financial independence in 2017. When you realize your investments are generating a paycheque that will support your essential living expenses, it’s a pretty magical moment.

So, my wife, myself, and our four boys decided to do something that might sound crazy but was probably the best decision we’ve ever made: we travelled around the world together for a year. We blogged about it HERE, if your readers are interested.

When we got back my wife and I had even more clarity about what was important to us.  It’s not big houses or luxury cars, it’s having control over our time. I think it’s important to realize that money’s great, but it’s just a tool we can use to help us accomplish important things in our lives. On DividendStrategy.ca I write a lot about investing and dividend investing, in particular, but it’s always woven together with thoughts and observations about the bigger themes and challenges that we face as investors and as human beings. For me, it all flows together.

Love the journey, Matt.

Our team (Joe and I), along with yourself of course have been followers of the BTSX strategy for years, at least in part. More on that in a bit!

For our readers, can you highlight why BTSX works so well? What does the strategy incorporate so well to make it successful long-term?

The long-term results of Beating the TSX are pretty impressive.

Here are the up-to-date numbers:

Over the last 30 years, it has averaged 12.2% per year versus 9.8% for the benchmark TSX 60 index.  This means that if you had invested $10,000 in BTSX back when David Stanley started tracking the data, you would have over twice as much as if you’d invested in the index ($359,000 vs. $161,000).  Of course, the average mutual fund investor would be far worse off than either.

As I write this, the S&P/TSX is down about 16% this year, the TSX60 is down almost 10%, but the BTSX portfolio is still in positive territory, although barely so.

How does it work? 

Beating the TSX is based on the Dogs of the DOW strategy in the U.S. but has performed much better up here. Here is the method in a nutshell:

1. List the stocks on the TSX 60 Index by dividend yield.
2. Select the top ten yielding stocks.
3. Purchase these stocks in equal dollar amounts and hold for one year at which point the list is regenerated and the process is repeated.

You might think that this method results in a lot of buying and selling, but it doesn’t for two reasons.

First of all, most investors who use the method will continue to hold stocks that have dropped out of the top ten as long their dividend appears safe. They’re usually only off the list because of price appreciation and are still great companies to own.

Second, the BTSX list is remarkably consistent with only 3 to 5 of the holdings changing year over year.

Why does BTSX work so well?

I’ve thought a lot about this because sometimes the results really seem a little hard to believe. I think there are a variety of reasons.

First, research shows that dividend-paying stocks outperform non-dividend-paying stocks. According to research by RBC, since 1980 Canadian dividend-paying stocks have had average annual returns of 9.1% vs. only 1.2% for non-dividend-payers.

Source: DividendStrategy.ca > https://dividendstrategy.ca/superior-returns/

Second, among dividend stocks, there is evidence showing that both yield and dividend growth are indicators of superior long-term returns. Most BTSX stocks tend to display both of those characteristics: high yield and good growth.

Third, and perhaps most importantly, the Beating the TSX method accesses the value factor. Value has been shown in academic studies to be a robust predictor of long-term outperformance. BTSX does this because the method is based on dividend yield: as the stock price goes down, yield goes up. Beating the TSX investors, therefore, tend to buy companies when they are on sale.

Curious then, how many BTSX stocks do you own? All of them and why or why not?

I own 8 out of the 10 stocks on the current BTSX list.

I don’t own Suncor or Manulife, mainly because of their inconsistent dividend histories. I also have enough financial and energy sector exposure with other stocks in our portfolio.

In addition, I own plenty of stocks that I bought years ago when they were on the BTSX list. There is no need to turn over one’s entire portfolio every year – that just increases complexity and transaction costs.  Strong companies that continue to pay generous, growing dividends and fit with the other components of our portfolio are generally held.

But I’ll be the first to admit that I don’t have a crystal ball. There are stocks that I’ve passed on in previous years that have been top performers and stocks that turned out to be duds. I’m okay with that because having a portfolio that I’m comfortable with lets me sleep better and makes me a better buy-and-hold investor. That’s essential for long-term success.

Some of your readers might read that and think, “Why are there stocks on the list that Matt isn’t investing in?”

Actually, this is a strength of Beating the TSX.

Unlike almost every other stock list out there that is based on opinions, the method for selecting BTSX stocks is simple, consistent, and completely transparent. No human judgment is involved. This is key to its success and also its usability by the average DIY investor.

So based on your portfolio construction Matt, it is fair to say you own those BTSX stocks but also other holdings and why is that so?

Yes.

Even though the long-term performance has been great, there are two main reasons why Beating the TSX stocks should not be used alone: sector diversification and geographic diversification. With BTSX, you only get Canadian equities and those tend to be concentrated in financials, utilities, and telecoms – great sectors to own, but hardly adequate diversification.

So, I use current and past Beating the TSX stocks for the majority of my Canadian equity holdings (about 75%), but have strategically added other Canadian stocks that combine two important factors: exposure to other sectors and dividend growth.

For example, I own Magna (MG) and Canadian National Railway (CNR) which I consider industrials. In the consumer cyclical, I own Canadian Tire (CTC-A). And in the consumer-defensive space, I own Metro (MRU). All of these are long-term holdings.

For international diversification, I use ETFs.

(I know you’re both fans of combining low-cost ETFs with Canadian stocks as well!)

The vast majority is in XAW, which gives me equities from all over the world (except Canada). For a little more emerging markets exposure, which I think is undervalued by historical measures, I purchased another emerging markets index fund. Pretty simple.

Great stuff, Matt. We also own XAW for the same reasons you do (full disclosure).

One of the pitfalls we see Matt, in following this strategy and only this strategy, is it narrows the pool of other available, high-quality stocks that dividend income and dividend growth investors could own. What’s your take on that?

Are BTSX stocks enough on their own?

Are there any downsides in following this strategy?

This is a great question because it gets to a fundamental point that is widely misunderstood, which is this: Beating the TSX is a tool, not an instruction manual.

If someone wants to buy every stock that’s on the list every year, that’s fine. I’ll be honest – that’s what I did for years. But neither David Stanley nor I, are investment advisors and would never suggest that a portfolio of BTSX stocks alone would be appropriate for anyone, no matter what the long-term returns.  BTSX is best used to identify potential dividend-paying stocks to invest in for the part of one’s portfolio that they’re appropriate for.

There are lots of other solid stocks than can be added to Beating the TSX stocks. They may be beneficial because they provide exposure to other sectors, and other countries, and/or have a strong history of dividend growth.

Investing only in BTSX stocks would have provided very high returns over the last 30+ years, but at the risk of under-diversification. When the portfolio is performing well, that’s great. But every good strategy will have periods of underperformance too and under-diversification might make it hard to weather those storms when it’s most important to. Confidence is a key component of discipline. I think a lot of investors are feeling their confidence being tested in the markets right now.

The proof is in the pudding. By following at least in part, a BTSX strategy we believe long-term, disciplined investors will be rewarded via dividend income growth AND capital gains – and could fire their financial advisor in the process.

Do you agree?

I hate to say it but a lot of financial advisors should be fired! Like you believe, Mark and Joe, there are good ones out there, but I have little patience for those who are mutual fund salespeople in disguise. The conflicts of interest in that model are brutal. Fortunately, more and more people are becoming aware of these issues and better options exist.

When I work with DIY investors one-on-one, they invariably want to build a financial and investment plan that maximizes returns, minimizes risk, and doesn’t require a lot of their attention. You don’t have to pay someone else 2% per year to get this – a fee that seems small but will cut one’s wealth in half after just two or three decades.

With the right temperament, guidance, and tools, individuals can and do outperform the pros all the time.

In my experience, when you minimize fees and stick to a simple buy-and-hold investment plan, it’s not just possible but likely.  For me and many others, Beating the TSX has been a very useful tool on that journey.

Thanks so much, Matt. Some great insights and perspectives to consider when it comes to BTSX.

Readers, we love the concept of BTSX stocks as a tool, not a complete investmenet instruction manual. We also love the fact that Matt believes in international diversification – and you can get this in a one-ticket solution in XAW in your RRSP, TFSA or other wealth-building accounts too!

None of these stocks nor low-cost XAW are recommendations for purchase, rather, considerations for you on your DIY investing journey. As always, personal finance is personal!

At Cashflows & Portfolios, we continue to believe taking most financial matters into your own hands will accomplish many things:

1. You will be more empowered on your wealth-building journey,
2. You will keep more of your hard-earned money away from greedy salespeople, and
3. You will learn more about yourself, and your relationship with money management, than if you sent your entire portfolio over to someone else to manage for you.

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

Developing and managing a well-diversified, investment portfolio, if executed well, is very likely to meet your retirement planning and/or your retirement income needs.

Should you ever need any assistance with those drawdown ideas, don’t hesitate to reach out!

We hope to post many other free articles like the one above in the future, and we’ll continue to help out Canadians as much as we can with our customized retirement projections services.

If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.

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

We hope to have Matt back again on our site, to share some portfolio updates down the line, and we hope to return the favour by becoming a guest post on his site in the future too!

What questions do you have for Matt and/or the BTSX strategy?

What stocks do you own as part of BTSX, how long, and why?

Further Reading:

You can use BTSX stocks to juice your retirement income.

Beyond BTSX stocks, like Matt Poyner, we believe in owning some low-cost ETFs for extra diversification beyond Canadian borders. Learn about some of our favourite low-cost ETFs to build wealth with here.

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