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The Dogs of the TSX 2015

One dividend strategy that is popular among investors is the Dogs of the Dow. In this strategy, investors buy the highest yielding dividend stocks on the Dow Jones Industrial average.

What is the Dow Jones Industrial Average (DJIA)? It’s a price-weighted U.S index containing 30 stocks from the New York Stock Exchange (NYSE) and the Nasdaq. For the most part, the index includes very large US blue chip companies such as 3M, Microsoft, Walmart, Proctor & Gamble, Johnson & Johnson, ExxonMobil (and 24 others).

With this strategy, you sort the index by dividend yield and buy the top 10 yielding companies at the beginning of the year, and sell the following year.  I’m not convinced of the buying/selling timing strategy outlined, but I can see some merit as a starting point for dividend investors.

Many of the stocks included in the DOW have very long histories of dividend increases; PG (60+ years), 3M (55+ years), JNJ (50+ years) etc.  In the end, you get a selection of the largest of US companies that have a mandate to pay dividends to shareholders for the long term.  For those of you interested, here is a site that lists the Dogs of the Dow selections by year.

Ok, so what, the Dogs of the Dow strategy is popular, but what about the Toronto Stock Exchange?  Is there a Dogs of the TSX strategy?  It’s actually not that hard to find.  Pull up the S&P/TSX 60 index (via XIU), and its holdings will show the 60 largest publicly traded companies traded on the TSX.

From there, a further sort by yield (like this site does), will give you some idea on the companies that may be a good fit for the strategy.

Right now, the list with yields above 3% includes:

  1. Crescent Point Energy 8.9%
  2. TransAlta 6.03%
  3. Arc Resources 4.94%
  4. Cenovus Energy 4.77%
  5. Teck Resources 4.66%
  6. BCE 4.65%
  7. CIBC 4.48%
  8. Pembina Pipeline 4.42%
  9. Inter Pipeline 4.34%
  10. Bombardier 4.23%
  11. National Bank 4.20%
  12. Husky Energy 4.19%
  13. Rogers 4.17%
  14. Bank of Montreal 4.11%
  15. Potash Corp 4.10%
  16. Shaw Communications 4.02%
  17. Bank of Nova Scotia 3.98%
  18. Royal Bank of Canada 3.95%
  19. TransCanada 3.74%
  20. Sun Life 3.62%
  21. Telus 3.60%
  22. TD Bank 3.48%
  23. Power Corp 3.45%
  24. Fortis 3.42%
  25. Thompson Reuters 3.39%
  26. Talisman 3.21%
  27. Enbridge 3.01%
  28. Suncor 2.91% (not above 3%, but had to include this name)

If you were to stick to the Dogs of the TSX strategy, you would pick the top 10 and go from there.  Personally though, I would not as a number of the top 5 listed do not have great dividend histories.

If I were to cherry pick the list, accounting for size of the company, dividend history and diversification, my top 10 would look like:

  1. BCE 4.65%
  2. Potash Corp 4.10%
  3. Bank of Nova Scotia 3.98%
  4. Royal Bank 3.95%
  5. TransCanada 3.74%
  6. Telus 3.60%
  7. Power Corp 3.45%
  8. Fortis 3.42%
  9. Enbridge 3.01%
  10. Suncor 2.91%

Overall, I like looking at these lists as it gives me ideas when adding to my dividend portfolio.  However, I would not use it as my core strategy as it has way too much turn over (buying and selling).  I’m more of the buy quality and hold forever.

What are your thoughts on the Dogs of the TSX strategy?

Disclosure:  I own a number of the holdings listed in this post.

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 17 comments… add one }
  • Paul T February 23, 2015, 10:10 am

    I think its a decent strategy, but tossing out the top contenders is counter to the whole idea behind it. The whole point is to buy the out of favour stocks (presumably ones that have dropped in price, hence pushing up the div yield). Basically holding your nose and buying whatever the formula spits out.

    IF you were to do this, consistently, year in and year out, then it could be profitable. The problem is most people can’t take a year or two of down returns without switching strategies. So in a practical sense, Dogs of the TSX would be a tough row to hoe. With most investors not being able to stomach the volatility.

    As for me personally, I’d do exactly what you’re doing :)

  • Bernie February 23, 2015, 1:33 pm

    The Canadianized version of Dogs of the Dow is called “Beating the TSX (BTSX)” It was developed by David Stanley in 1987 and has been publicized at least annually in Canadian MoneySaver magazine from inception. More on this successful strategy in this Finiki link…
    http://www.finiki.org/wiki/Beating_the_TSX

    • FT FrugalTrader February 23, 2015, 1:36 pm

      Thanks for the link Bernie. Do you follow the strategy?

  • Bernie February 23, 2015, 2:18 pm

    Frugal,

    I know many readers of Canadian MoneySaver have done well with the BTSX strategy but I’ve yet to try it out myself. I even thought about trying an adapted version. There frequently were “duds” in the annual selections that did poorly. TransAlta (TA) was a frequent underperformer. The poor performers often had payout ratios well over 100%. I feel eliminating the >100% POR candidates would lead to a better overall performance of the strategy. I really should do some back testing to see how this modification would have flown.

    I suppose my main reason for putting BTSX on the back burner is the performance of my dividend growth portfolio. It’s more buy and hold & usually trumps BTSX and the equity indexes. Tough to change when things are going well.

  • FT FrugalTrader February 23, 2015, 2:25 pm

    @Bernie, if you wouldn’t mind sharing, what are your top 10 dividend growth stocks?

  • Paul T February 23, 2015, 3:02 pm

    I agree with @Bernie that any company in the 80%+ Dividend Payout Ratio should be tossed out, or at least heavily scrutinized. Otherwise they’re just eating into cash balances / taking on debt, to sustain the dividend. And we all know what happens to stock prices when dividends are cut.

  • Bernie February 23, 2015, 3:23 pm

    Frugal,

    I’m not sure what exactly you mean by “top 10”. A dividend growth investor’s main focus is on growing income through dividend stocks that provide reliable, consistent rising dividends. Once the selection of chosen stocks are in place it’s basically just monitor occasionally to ensure the income growth is intact. Watching financial news and daily swings in prices can be stressful. DGI is less risk, less stress because overall total return is secondary to income growth. DG stocks also tend to be less volatile with a lower beta than the index. Because of the popularity of these kinds of stocks they can frequently be priced to perfection. It’s beneficial to wait for a better entry price unless you plan to hold for long term.

    I hold Canadian, U.S. and currently one Int’l DG stocks in my RRSP (32 total). As we were discussing the TSX the 10 Cdn stocks that I own & have given me the best dividend growth over the past 3 years are:
    CMG BIP.UN ENB AD TD T NA RY IPL KEY

  • Bernie February 23, 2015, 3:30 pm

    Frugal,

    Sorry, CEU should have been included in there, so you get 11…lol. CEU might have slowed dividend growth this year at least though because of oil prices and service stocks being out of favour.

  • Chet February 23, 2015, 4:18 pm

    Paul T; As a general principle I agree with your observation as a 20% cushion does not leave much room for increasing dividends over time. However this raises a question on how you calculate the payout ratio. If one uses a traditional approach ie) Dividend / Earnings then it should probably be closer to 60% (that is what I used to assess potential risk, red flag). However I found the following article by John Heinzl back in November 2014 very instructive..

    http://www.theglobeandmail.com/globe-investor/investor-education/dividend-investors-follow-the-cash-flow/article21707455/

  • My Own Advisor February 23, 2015, 7:38 pm

    I own a number of holdings in that post as well. I prefer a buy and hold forever approach (like you) and when prices tank, I buy more.

    I DRIP most of those stocks FT and likely always will until that is I “turn off” the DRIP taps for retirement income.

    My top-10 would be very similar to yours although I would add CU and CNQ to the list although the yields are lower.

    Cheers my friend,
    Mark

  • Bernie February 24, 2015, 2:31 am

    I like CU but prefer WCP for Cdn oil.

  • Kevin February 24, 2015, 7:04 pm

    I have been using this approach for several years on about a third of my portfolio and it does beat the TSX total return index 4 out of 5 years. The true dogs of the Dow uses the highest yielding dividend stocks except the highest one because it might actually be in trouble and uses the Dow 30. I limit it to the tsx 35. It takes me about three hours a year to manage. You end up invested in banks, energy/commodity companies and Big telecoms – BCE, Telus, Rogers.

  • Bernie February 24, 2015, 9:13 pm

    Kevin,

    Are you sure you don’t mean the “TSX 60”? The TSE 35 hasn’t been around for quite a few years.

  • BeSmartRich February 25, 2015, 8:20 am

    Interesting strategy for sure. It can be profitable sometimes it won’t be. I would definitely pick similar companies as you to increase possibility of getting more stable dividend with my portfolio growth.

    Thanks for sharing!

    BeSmartRich

  • Beric May 13, 2015, 7:41 pm

    I guess I’m late to this party, but as someone who modelled this portfolio for five years between ’97 and ’02 before jumping in with real money, I thought I’d chime in. This works, and has returned >12%, CAGR. As the TSX has changed in composition over the last 13 years, so have my filters. I started with the simple rule of selecting 5 of the top six yielding; the reasoning being the top yielding is likely stressed in some fashion. It kept me out of companies like Bombardier before they hacked the dividend, Yellow Pages Media, and so on. Income Trusts were added at one point, and they grabbed the top 10(?) or so spots; stayed clear if them then, and I stay clear of them now. And finally, I will not touch a miner, gold or otherwise; they tend to shoot the dividend first, ask question later.

    I do almost zero analysis; this should be the ultimate KISS portfolio; I call it my spreadsheet and calendar portfolio because those are practically the only tools I use. If you’re interested, follow the link back to my blog; I try to keep things transparent there.

    • FT FrugalTrader May 14, 2015, 8:52 am

      Thanks for sharing Beric. I did some digging on others who have utilized the dogs of the tsx strategy, and it appears that 12% CAGR is consistent. The key is to stick to a strategy through thick and thin. Did you outperform in 2014? I’ve read another report that this strategy did not beat the TSX in 2014 but still beats over longer term.

      • Beric May 24, 2015, 8:47 pm

        Sorry for the late response; for the calendar year 2014, the portfolio returned 12.9% vs. 7.4% for the TSX. Returns for the portfolio on the May 13 anniversary date was much different: 0.82%, but it still beat the TSX’s .02%. The Alberta election cast a bit of a shadow over my selections …

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