This is a guest post by Dale Roberts who writes and operates the Cut The Crap Investing blog that helps Canadians find the many paths to sensible low-fee investing.
Mike, aka The Dividend Guy asked my to share my personal experience as an investor as it includes the use of individual stocks and ETFs. From my experience that combination appears to be the most common approach or the most common ingredients in the portfolios of Canadian self-directed investors. Of course the most common approach for investors is a managed portfolio and that’s why I write on the Canadian Robo Advisors and One Ticket Portfolios on my site.
But you’re a self directed investor, and you’re in the driver’s seat, and you can create and shape your own portfolio in the most cost-effective and most advantageous manner. You might use an all-stock portfolio, and you might also use that stock/ETF tag team.
As a who-is-this-Dale-Guy backgrounder I am a longtime self-directed investor. And I’ll admit to an investment journey that has meandered and ‘evolved’ continuously over the decades. I was not afraid to buy individual stocks even when I didn’t really know what I was doing. Of course courage on its own does not make for a successful investor. I’ve been treated to a few expensive lessons. But luckily I’ve always had other attributes such as a higher tolerance for risk, and at least an understanding and appreciation for my evolving risk tolerance level. I’ve also had enough patience along the route. And the main evolutionary path or theme has been a continual pull to Simplicity.
An indexer at heart I do believe (mostly) in buying a big enough basket of market leading companies in Canada and the US. Similar to Mike, I’ve largely stayed away from International stocks and ETFs. And of course, creating that portfolio can be easily achieved by way of holding enough individual stocks or by grabbing that basket quickly and easily by entering a 3 or 4 ticker ETF. I personally have evolved into an index skimmer. For the US component of the portfolio I simply skimmed 15 of the largest cap Dividend Achievers from Vanguard’s Dividend Appreciation Fund, VIG. You can read about those holdings and that approach starting with this article on Seeking Alpha – Buying Dividend Growth Stocks Without Looking. I bought ‘em without any additional evaluation and I’ve added to those companies, mostly to the stocks that were out of favour.
I also allow myself a pick or three and we hold Apple, BlackRock (the leading ETF creator) and I just had to invest alongside the world’s greatest investor. We hold Warren Buffett’s Berkshire Hathaway BRK.B as one of the bigger positions in one of my wife’s portfolios. Those picks have done very well for us on a total return basis. The role of BRK.B is to provide lesser volatility and drawdown in a major market correction. That is the history of Berkshire, I’d be happy to get a repeat.
The Canadian holdings.
I was an early investor in the first ETF, XIU for Canada’s TSX 60. I think that is a great fund and I suggest on my Model ETF Portfolio page that they consider XIU as a core holding. It is certainly even more concentrated in the banks and other financials and telco’s compared to the broader market XIC. I see that as a positive as those protected oligopoly situations in Canada present some wonderful and unique opportunities. What can be better than well run businesses with little competition and ‘protection’ from regulators and politicians?
That said, I’ll admit to moving in and out of XIU a few times in my investment career. My approach changed and evolved as I continued the education process and as I moved through a quick and aggressive accumulation investment stage where total returns ruled and into a more ‘protected state’ as I want to create more lasting and growing portfolio income. That income can certainly come by way of dividends and bond income and share harvesting.
I’ll also admit to moving in and out of some of those wonderful oligopoly stocks where I should have assumed the practice of buy and hold and add. It was in an internal struggle with the great question that many investors might attempt to answer.
Am I a stock picker or an indexer?
I sold a few of my Canadian bank stocks and telco’s when I decided to be a more pure indexer. But when I looked back at the long term performance of the Scotiabank’s (BNS) and Toronto Dominion bank (TD) and telco’s such as Bell (BCE) and Telus (T) I realized that I would have been better off had I simply stuck with those big oligopoly (market beating) stocks.
For some reason I did stick with my two energy/pipeline holdings of Enbridge (ENB) and TransCanada Pipelines (TRP) through that battle of Stock Picker or Indexer. The performance of those 2 companies taught me a lot about patience and consistency.
Here’s the two pipes in an equal weight portfolio vs The Market from January of 2008 to end of June 2019. Portfolio 1 is the Enbride / TransCanada combo.
You’ll see that same trend of outperformance within all of the oligopoly sectors in Canada. My concentrated portfolio that goes by the name of The Canadian Wide Moat 7 includes the 3 biggest Canadian banks, two telco’s in Bell and Telus and those two pipes. Yes I only hold 7 companies as the Canadian component of my personal RRSP portfolio. Certainly, don’t try this at home.
You’ll also find that outperformance within the oligopoly space of the grocers and the rails. On Seeking Alpha I wrote on expanding or completing that oligopoly theme with this article.
Many will certainly hold the opinion that I should ‘expand’ into those other oligopoly areas. Because of my personal investment history with those companies, I am comfortable with that concentrated portfolio and concentration risks.
The Canadian oligopoly sectors.
I am also in agreement with Mike that a Canadian investor might add in the repeatable business model of Couch-Tarde and a few utilities. I had also suggested the Brookfield conglomerate. Like Mike I don’t think it would be difficult to create a simple and successful Canadian stock portfolio – I obviously like that oligopoly approach.
While I was seeking greater security and reliability of those juicy dividend payments of the Wide Moat 7, the total return out performance is simply a nice surprise. I will capitalize on that one day with some share harvesting.
Using Dividend ETFs
For my wife’s accounts I do not expose her to that same concentration risk, she is invested in Vanguard’s Canadian High Dividend Yield ETF (VDY). That fund in concentrated in the Canadian financials and you’ll also see those pipelines and utilities and telco’s in the mix. The yield on the fund is currently 4.25%. The outperformance vs the Canadian market from VDY inception in December of 2012 is modest at about .60% annual. The MER on the fund is .22%. In her spousal account she continues to hold a modest amount that of TSX 60 XIU.
Another great use of ETFs for Canadian dividend investors is to easily gain US and international exposure. One can enter a ticker symbol and get instant access to all of the US Dividend Aristocrats (NOBL) or the Dividend Achievers (VIG). And of course gaining International exposure is more than challenging for a Canadian stock holder. They can access the core broad market International index ETFs or use an International Dividend fund such as iShares XGD that covers the global High Dividend Yield market(s). That index approach applies those smart beta dividend health screens.
Stocks and ETFs can work well together.
Mike wrote a wonderful post for Cut The Crap Investing (Canadian Canadian Stock Market – Safe Haven for Stock Pickers) and I’d have to agree that it’s a personal decision. And I know that Mike and Dividend Stocks Rock has a great performance history for the portfolios, but I try and keep it even more simple. I don’t want to stretch outside my comfort zone. I do not have the ability to analyze stock financials in great detail, so I’m not going to go there.
I’ll stick to my moats and ETFs and index skimming. The most important consideration is to remain consistent and patient.
Thanks for reading. And thanks to Mike for giving me the opportunity to connect with his readers. And thanks for the great guest post on Cut The Crap Investing.
Editor’s note: If you want to know what I (The Divdiend Guy) thinks about ETFs investing (vs Dividend), you can read this post: Should I Go With Dividend Growth Investing or ETFs? An Answer to Ben Felix
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