Can you beat the index?  Yes and Ross Grant proves it.

Beating the index sound like fiction?  It’s a fact and you might be able to do it just like Ross Grant did.  Ross Grant is an engineer by trade and like most engineers he likes figuring things out.  Based on his book entitled Destination:  Early Financial Independence it looks like Ross figured out early retirement fairly well.

I had a chance recently to talk to Ross about his book, his writing gig at Canadian MoneySaver, the investment approach “Beating the TSX” and other financial subjects.

Ross, thanks for this and good to finally talk.

Thanks Mark for your interest in the investment strategy I use.  I hope your readers will pick up a few tips our discussion that may help them reach their financial goals sooner.

Ross, I have a copy of your book Destination Early Financial Independence – How You Can Get There & Manage Your Investments Throughout the Journey and I thought the concept (a series of short letters from father to daughter) was great.  Could you tell readers a bit more about the book, your inspiration for it and some of the key chapters?

When I was 22 I started my first job after graduating as an Electrical Engineer.  After a particularly tough day at work I came home and decided to figure out what it would take to exit the work force.  After 2 hours on the computer I came up with an answer.  I changed jobs shortly after that but still kept working towards the financial independence goal.  My wife and I retired 21 years later at age 43, having achieved financial independence. Seven years later I decided that I needed to capture how we had accomplished this so that my daughters would be able to benefit from our experience.  I wrote this book for them, but decided to put a bit of extra effort into it for so others might benefit as well.

I was excited to capture the simple process that we had followed over the years and share it with others so they might enjoy similar success.  I have distilled down many years of financial reading and experience into the important steps we took.

Often when I meet someone that is interested in financial education, the first thing they want to know is what stocks to buy.  This is actually the last question they should be asking.  I usually ask them if they know how much they need to earn to pay for their current living expenses.  They usually don’t know.  The first third of the book, “Early Life Lessons”, covers the important topics related to financial management.  Trying to reach financial independence without basic financial management skills is like trying to win a hockey game without knowing how to skate very well.

The next third of the book, “Investment Strategy”, covers Beating the TSX (BTSX).  This interesting section describes an easy to apply process that eliminates the investment expense of mutual fund management fees and provides a very good long term return with minimal time and effort.  I spend 8 hours per year on the process and have made and average of  11.2% per year over the last 15 years.

The last chapters in the book cover “Financial Independence”.   I discuss how much you need to be financially independent and how we actually manage our finances.  Overall I think I have captured the strategies that I hope my children and others will also benefit from to achieve their goals.

Let’s talk about “Beating the TSX”.  Can you share concept?

The BTSX was developed by David Stanley and he obtained a 12.47% return over 28 years.  He asked me to carry on sharing the process and results in the Canadian MoneySaver.  Here is a very brief explanation of this strategy.  BTSX involves ranking the stocks in the TSX 60 from highest to lowest dividend yields and then investing equally in the top ten.  There are some former income trust stocks that are excluded, so make sure you are familiar with all the details of the process.  The ranking process is completed annually to generate an updated list and changes to the stock holdings are then made.

Here are the benefits of the process:

  1. The MER (Management Expense Ratio) paid on the BTSX portfolio is close to zero. An average MER of a Canadian actively managed mutual fund is in the range of 2 to 2.5%. By managing the portfolio yourself you avoid this cost and get to keep more in your pocket.
  2. The dividend income that is generated is what we use to live on. There is no need to sell capital to provide income. Retirement income management is very simple.
  3. The dividends have preferential tax treatment, so we pay low taxes compared to other types of income.
  4. Many of the companies are continually raising their dividends. So far, the average yearly increases are equal to or greater than inflation. Thus, your retirement income has the potential to keep up with inflation, or perhaps even grow faster.
  5. Deciding which stocks to sell and what to replace them with is made easy with the annual review process.
  6. The amount of time I spend annually to manage the BTSX stocks is low, making it very manageable in a busy lifestyle.

What risks come with “Beating the TSX” approach?

BTSX comes with all of the risks of investing in stocks that we are familiar with.   A particular stock or stocks in the portfolio of 10 may not do well or may even cut its dividend.  The benefit of buying a bucket of 10 stocks with equal investments in each is that it forces the investor to diversify and thus help to reduce risks.  I always recommend that followers of the BTSX process be comfortable with any stocks in the list that they purchase.  If there is one particular stock that they are uncomfortable with, they should skip it and pick the next one down on the list.  Remember, this investment strategy is not supposed to keep you up at night.

I get the approach but why not buy and hold the top stocks in the TSX (i.e., Canadian banks, telcos, utilities and pipeline companies), stop selling TSX stocks every year as part of the “Beating the TSX” approach?

In order to pick the “top” stocks you still need some kind of criteria that defines what a “top” stock is.  Then the criteria must be monitored over time to see if you are still holding on to the top stocks.  A different approach such as you suggested, could perform well but the question of whether it is better or worse than BTSX could only be proven with some back testing and some ongoing comparison of the two methodologies.

I am convinced that one of the key benefits of the BTSX process is that it helps move the investor out of the stocks that have done well and purchase other stocks that are struggling somewhat.  It forces the buy low, sell high action that is needed to produce returns that are above the market average.  Without the changes in the BTSX portfolio the return would likely approach the overall average return of the market.  If you were happy with the market return, the much simpler alternative is to invest in a market index ETF like XIU.

I’m a hybrid investor – I own dividend paying stocks for increasing passive income and I own a few broad market, low cost Exchange Traded Funds (ETFs) for diversification.  What do you make of my investing approach for an early retirement?

It sounds like we have a similar mix of investment choices so I would have to say your approach is fine.  The important question is how does your long term return of your dividend paying stocks compare to the BTSX return and how much time are you spending making your investment choices.  If your returns are the same or better than BTSX and you are not spending too much time in front of a computer screen, then you are doing well.  I find that most people do not keep track of their ongoing portfolio returns and thus are unable to compare with other alternatives.  The first step is to make sure you have the data on your annual returns.

The second suggestion I have for you is to create a summary sheet of the dividend income you are receiving from all your investments.  This is the income that you will be using to live off once you are no longer working.  If you focus on this growing income, rather than the fluctuating market prices of your stocks, you will be more relaxed day to day and will also make better investment choices.  You will look at a falling market as a great opportunity to increase your dividend income at a lower cost than in the previous month or year.  A falling market will be a good opportunity (to catch a sale) rather than something to lose sleep over.

Back to you Ross – are you still using the “Beating the TSX”?  What investing success have you had?  Can you share some of your current investments?

Yes, BTSX is performing as I had hoped.  Here are the results as per the end of 2015.  It is beating the index by 48%.

Beating the TSX returns vs. the index (%)
2000 – 2015
Portfolio Index
Avg Yr. Total Return (%) 11.20% 7.6%
Portfolio Outperformance 48.3%

Here is the current BTSX list of stocks for 2016:  NA, CM, BNS, SJR.B, BCE, PWF, ENB, TRP, T, BMO.  The results of 2016 will appear in the Canadian MoneySaver in early 2017.

What’s your take on index investing?

I think index investing is a good choice for investors that have started with mutual funds and want to become more involved in the management of their portfolios.  Some investors may find that index investing is as complicated as they want to get.   Over the long term, the majority of mutual funds struggle to beat the returns of our major indexes.

I started with XIU’s and gradually built up a portfolio of dividend stocks.  I never sold any of the XIU’s and my average purchase price is half of the current market value.  As well, the dividend income generated by the XIU’s has grown to twice the original amount.  From the previous chart we can tell that the return has been 7.6% over the last 15 years which is quite good for a buy and hold investment.

I will continue to hold the XIU’s as it is nice to have a winning investment in the years that the index outperforms the BTSX process.

How’s the writing gig at Canadian MoneySaver?  Any advice for an aspiring writer like myself?

Writing at CMS has been a great experience.  I have enjoyed sharing my investment ideas and results with readers.  I don’t think you will find it any different than the writing you have done on your blog.

What are your financial plans for the future? 

I plan on continuing to follow the BTSX process.  I will be monitoring the results and sharing them with readers.  Hopefully the future results will be similar to historical results, but that is not a given.

Any final words of wisdom to share with new investors?

New investors need to increase their financial knowledge and investing experience to move forward to meeting their financial goals.  They need to ask themselves 3 things before deciding if they want to become a do it yourself investor.

  1. Do they have the interest in doing their own investing?
  2. Do they have the time it will take to become educated on the topic?
  3. Do they have or are they willing to learn the skills required. Such skills would be math, organizational, and computer skills such as the ability to manage excel spread sheets.

If your answer to all of these questions is yes, then you can get started.  Otherwise it might be best to obtain professional support until you are ready to try it on your own.  For those of you who are up to the challenge, the rewards can be well worth the effort.  Best of luck!

Thanks for this Ross and congratulations on your early financial independence.

Readers, what’s your take on the BTSX strategy?  What questions do you have for Ross?

Mark Seed is the founder, editor and owner of My Own Advisor. As my own financial advisor, I've grown our portfolio from $100,000 to well over $500,000. Our next big goal is to own a $1 million investment portfolio for an early retirement. Come follow my saving and investing journey by subscribing to my site. Delivered by Subscribe Here to My Own Advisor

63 Responses to "Can you beat the index?  Yes and Ross Grant proves it."

  1. It’s a very interesting approach. In fact, the TSX 60 probably represent most of the top Canadian Blue Chip companies so you have a good rotation of stocks in there. Funny thing is that 50% of the list is in the financial sector, 30% in the telecoms and a couple in the pipeline. They have consistently paid in the 4%-5% which means they probably are recurring stocks in the list.

    I would be curious to see what the rotation of the top 10 stock is like over the past 10 years? The banks are probably swapping TD and RY in the mix with the others and then RCI.B probably shows as well.

    Another curious thought, what would holding the top 15 stocks of the TSX60 have done after 15 years without trading them? Could it have beaten the TSX?

    Reply
    1. Actually, I just had a quick look at the list. Some of the companies will never have a yield above 2%, let alone beat a bank at 4%. I would be interesting to see what the stocks matching an annual dividend growth of 10% over 10 years with 10 years of dividend increases do from a selection perspective. You would end up including stocks such as SAP, MRU, CNR, along with ENB. Unfortunately, the banks lost their streak …

      Reply
      1. Nothing wrong with the performance of ENB over the years. I recall SAP routinely hikes their dividend and they also did a stock split a few years ago. CNR is a good capital gains stock.

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    2. Ross can likely answer that (re: rotation) but that is what I suspect. Every few years, you cycle between different banks, different telcos, different pipelines and some consumer stocks.

      As to your question: what would holding the top 15 stocks of the TSX60 have done after 15 years without trading them? Could it have beaten the TSX?

      I bet it has and my portfolio shows that if you hold the top stocks in the TSX 60 (which is what I do) then you have a good chance of beating the index as well. Stay tuned for that post. In the meantime:
      http://www.myownadvisor.ca/canadian-stocks-to-buy-and-hold/

      Good to hear from you.

      Reply
  2. Hi Mark
    good post – I’ve been following R ( and Stanley before him) in CMS for years

    quick comment re popup – I clicked on the first link (“can you beat the index”) in the email and popup appears – click it again and no popup appears – hope that helps – suspect a flag is being set on first click to prevent further popups

    Reply
    1. Thanks for the kind words about the post.

      Yes, re: popup. I think it might appear only once, and then, if you move around the site, hopefully nothing!

      Reply
  3. “Excluding former income trusts” – which of the current top 10 yielding stocks fit in this category? Most of these have lost significant value over the last year with only one with positive returns. Or do you have to time the market for when you re-balance?

    Name Yield 1Y %
    Potash Corporation of Saskatchewan Inc 9.35 -47.56
    Husky Energy Inc. 7.99 -41.14
    Crescent Point Energy Corp 9.79 -28.13
    Inter Pipeline Ltd 5.56 -14.67
    National Bank of Canada 4.64 -13.26
    Shaw Communications Inc 4.64 -9.53
    ARC Resources Ltd 5.72 -8.38
    Cenovus Energy Inc 4.39 -7.59
    Pembina Pipeline Corp 4.76 -6.73
    BCE Inc. 4.27 12.5

    Reply
  4. Like how it was job dissatisfaction which drove him to take action. 😉

    “BTSX involves ranking the stocks in the TSX 60 from highest to lowest dividend yields and then investing equally in the top ten.”

    I touch on this in my future post. It’s nothing new, just with a twist.

    “it helps move the investor out of the stocks that have done well and purchase other stocks that are struggling somewhat. It forces the buy low, sell high action that is needed to produce returns that are above the market average.”

    Basic countercyclical investing. Sell things when they are expensive and buy when they are cheap. Also helps keep your portfolio from being “over-valued”. Unfortunately, people have a hard time selling winners.

    “The BTSX was developed by David Stanley and he obtained a 12.47% return over 28 years..[I] have made and average of 11.2% per year over the last 15 years.”

    ALWAYS be skeptical of pursuing a past performance. Would love a breakdown of his annual performance to see how much of his “beating” came from 2009-2015. Investing eras and environments will never be the same, similar perhaps, but never the same.

    “I always recommend that followers of the BTSX process be comfortable with any stocks in the list that they purchase. If there is one particular stock that they are uncomfortable with, they should skip it and pick the next one down on the list.”

    Dissonance. On one hand, he lays out specific rules to follow and implement but then says to let instinct and emotion — avoiding being uncomfortable — ultimately rule the course of action. Surprising coming from an engineer.

    “The benefit of buying a bucket of 10 stocks with equal investments in each is that it forces the investor to diversify and thus help to reduce risks.”

    Diversified with 10 Canadian stocks?? I don’t think so.

    “The last chapters in the book cover “Financial Independence”. I discuss how much you need to be financially independent…”

    This is a huge problem within the financial sector, both personal and professional — correct language. There is no such thing as financial independence. The only way to achieve such a moniker is to have a Scrooge McDuck sized vault of cash; every other manner ties your finances to some other entity, e.g. 10 Canadian stocks and their dividends. A correct term might be “employment independent”.

    Might give it a read out of curiosity.

    Reply
  5. As per the interview, the current list of BTSX stocks are NA, CM, BNS, SJR.B, BCE, PWF, ENB, TRP, T, BMO. Only 3 of the above mentioned stocks on in the BTSX list. Many of the stocks in Matt C’s list are former income trusts. POT was removed early in the year when they cut their dividend.

    Reply
    1. Thanks Ross! I must have missed the line with the current holdings. So any stock that cuts dividends is removed immediately or on next re-balancing? Are there any other factors that cause a holding to be removed?

      Reply
      1. A stock that cuts its dividend is removed immediately and replaced with the next one down the list at the time of the change. Generally stock cuts don’t happen to often, but recently there were a number of them due to problems with the resource companies. There aren’t any other factors that cause a holding to be removed.

        Reply
  6. Generally the BTSX is a good strategy and if one is just interested in looking at short term performance, it’s fine. I followed the strategy for several years, but disliked the Re-balancing (especially selling a stock no longer on the list and replacing it with a weaker one) and the limited stock selection (by always looking at the ones with the highest yield at the end of the period). I’m not saying that it is not a long term winner, but I found the Connolly strategy more to my liking. It identified many of the same stocks (avoiding trusts and many weaker DG stocks the BTSX includes), but its selection criteria was based on more than yield. Cyclicals were also on their list which I realized should be avoided (they cost us in the long run). I preferred to buy only good DG stocks, hold them forever and add when they were valued priced (which usually showed up on BTSX list).

    Reply
    1. I did the same and found two issues. One is re-balancing, tough to do with individual stocks. DS approach, as mentioned, was to buy and never sell. His approach was more about buy stocks on sale than trading. Second thing I noticed was it’s hard to find enough money to keep things in balance. Setting it up was easy but finding the money to keep things in balance was harder. Long story but in the end I sold all my individual stocks and ETFs and bought a dividend ETF (XEI) 70 stocks and a decent yield. The stock goes up, it goes down and each month my dividends get re-invested peace of mind. I’m also close to retirement so it’s about income not capital gains for me.

      Reply
      1. Great to hear from you Rob. I own a number of stocks in XEI directly, but I see you point and I’m starting to think it’s going to be about income for me, soon, and not about capital gains within 10 years, maybe eight or less.

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  7. To comment properly on the Rotation question would probably take a while. The short version is that usually 2 or 3 stocks are changed at the end of the year. Although there are years where none are changed, and other years where 5 might be replaced. The higher consistent dividend payers like BCE usually sit on the top of the list. TD has never made the list, although I own it outside of the BTSX portfolio. The stocks which generate more of the capital gain portion usually come from the 7th to 10th positions on the list. They are out of favour but still maintain their dividend and make it on the list. The stock then recovers and it may be off the list the next year.

    Reply
    1. Good point Ross. This is my experience following you (and David Stanley’s approach) for a couple of years now. I usually own a number of BTSX stocks and many (like TD) that don’t make the list. I think in the end your approach works because high-yielding, consistent dividend payers, are a sign such top stocks are out of favour and priced rather low (than market highs).

      Thanks for a great interview.

      Reply
    2. @Ross

      Thanks for sharing. Much appreciated. I can’t say I have invested for an eternity but since I started focusing on stocks in 2009, I have concluded the options in Canada for strong blue chip companies is somewhat limited which is why the same stocks show up in the list year over year. It then concludes that it can highlight a strategy of finding a stock out of favor.

      Reply
  8. What about US and other Int’l investing?

    I keep between 30-35% in Canada, 45% in US and 25% other Int’l

    The split through all of our account depends of the tax advantage of each asset.

    Reply
  9. For US investing I use ETFs like DIA and SPY and I also follow Dogs of the Dow strategy. I don’t have any other international exposure. I figured between the US and Canada, I have covered 52% of the market capitalization of the world. Do I really need to be everywhere? It is all about the returns you get anyway. I have been quite happy with the long term returns I am getting locally. I am much more familiar with Canadian and US companies than other parts of the world. In my book I breakdown how my portfolio is structured.

    Reply
    1. Good enough Ross, sticking to a plan is a big chunk of the investing success cake!

      For myself, I think a one stop deal like VXUS wich holds over 5,500 stocks worth a little place in my portfolio.

      Reply
      1. VXUS is a great product Le Barbu. I know it doesn’t necessarily fit with Ross’ plan but I wouldn’t hesitate to recommend it as part of a long-term, diversified investment portfolio.

        Reply
  10. Ross – I have essentially the same stocks as those in the top 10 in your list in various percentages – financials @ 20% approx. I have 600K cash to invest – would you jump in now when the market (TSX) is > 14,000 and most of those in the list are at 52 week high? I am not in any hurry and would rather wait for a “correction” – but the wise men I know have been preaching “time in the market is better than timing the market”. What would you do?

    Reply
    1. Mike – There are many aspects to your question and I will address a few of them.
      1. This is obviously a lot of cash so you need to ask yourself, “Is this an amount of cash I am use to investing or do I need professional guidance?” If you are used to having this amount to invest, is it above or below what you normally have on hand to invest. For example, if it is less than you would normally keep to take advantage of low priced stocks in a market crash, then you need to keep it on hand.
      2. Since I have accepted the fact that I do not know the direction of the market, I try to invest only when I know the stock prices are lower than they have been in the last while. This could be the last year or even better, the last 3 years. Then you are “more” likely getting the stocks at a good price. The middle of January this year was a good example. There were a lot of good deals in BTSX stocks to be found so I added to those positions because the prices were so good.
      3. If I have a larger amount of money to invest and I feel that I want to invest it, I make up an investment plan. I might decide I want to split the total into numerous amounts and spread them out over a year or maybe even two. If somewhere along the timeline there is a market drop then I might accelerate my plan and invest more in the stocks that are now “on sale”.
      I would not be in a rush to invest. If stocks go down in the future you would have cash to invest at the lower prices. If the market goes up, you would miss out on market gains from the stocks you didn’t buy, but you would make money from the stocks you previously had been invested in. Both of these scenarios are actually Ok.
      In the end, you need to be able to Ok with whatever decision you make whether the market goes up or down.

      Reply
  11. This sounds like an interesting strategy. I guess it can be applied to any Index.

    One of my goals is to build a Belgian biased DGI portfolio, mainly for tax reasons (we have a hefty double taxation when owning non Belgian stock). A good exercise to make to compose my wish list.

    Reply
    1. Yes it can Amber Tree. I like your plan for your own DGI index, I’ve done that with my CDN stocks. Just don’t forget to diversify out of your “home bias”.

      Reply
  12. Seems my comment was vaporized (damn you new computer!). Second try…at bursting the bubble…

    “BTSX” — not sure why it’s so important to beat the TSX. Great example of home country bias. Is the TSX even the right benchmark for the majority of investors to gauge their financial goals? Canada makes up a scant ~3% of the global equity market…plenty of fish.

    “Financial Independence” — a big problem in both personal and professional finance is incorrect terminology and language, this being a steadfast example. There is no such thing as financial independence unless you have a Scrooge McDuck-like swimming pool vault overflowing with cash. All other combinations tie your finances to a third party entity, e.g. dependence on 10 Canadian companies — and the Canadian economy — and their ability to pay dividends. A correct term might be “employment independence” (the driving force behind why Grant choose his strategy). But I guess ‘financial independence’ has been marketed into the general public so trying to change things now is nearly impossible.

    “The BTSX was developed by David Stanley and he obtained a 12.47% return over 28 years……[Grant] made and average of 11.2% per year over the last 15 years.” — past performance and all that… The thing with investment strategies and schemes is that they work until they don’t. Both Stanley and Grant enjoyed an investment era of which will most likely never occur again in any of our life times. I’d like to see a year-by-year breakdown on their returns (available?). I wouldn’t be surprised if the dividends accounted for almost all of their winning margin. There’s a problem with trying to sell the past into the future; the other problem is financial pillars don’t sell (e.g. would you buy a PF book that merely tells you to save more than you spend?). Financial pillars are Truths, they can be replicated exactly in any type of economy or market environment; strategies on the other hand, are dependent or circumstance.

    “The benefit of buying a bucket of 10 stocks with equal investments in each is that it forces the investor to diversify and thus help to reduce risks.” — I won’t be reading or recommending this book based solely on this statement. A basket of 10 Canadian stocks is NOT diversified, nor risk reduced, by any metric or definition.

    “I always recommend that followers of the BTSX process be comfortable with any stocks in the list that they purchase. If there is one particular stock that they are uncomfortable with, they should skip it and pick the next one down on the list.” — Huh? First Grant lays out the rules and process of the strategy to follow, based presumably on logic, then he turns around and tells the investor to rely on instinct and emotion to rule the process to avoid the “uncomfortable”. A bit bizarre coming from an engineer. The criteria can’t be that strong if uncomfortableness is able to over-ride.

    “I am convinced that one of the key benefits of the BTSX process is that it helps move the investor out of the stocks that have done well and purchase other stocks that are struggling somewhat. It forces the buy low, sell high action that is needed to produce returns that are above the market average.”

    This is basic countercyclical investing but with an unnecessary twist. You could do the same with a stock/bond index fund portfolio.

    There is no taking away what either the author or the originator accomplished, but then again, was it them being extra intelligent and savvy or was it just a matter of right-time right-place (or a combo)? We don’t know without access to all their data. All in all, this is kind of why I don’t read any personal finance books.

    Reply
    1. SST: A lot of down comments, but what alternatives do you suggest? Not that I disagree with some of your comments.

      Personally, as I’ve mentioned before, it’s the income my investments generate that I care about. Are they up from last year (total income not a year by year change) and have the companies continued to raise their dividend (not necessarily every year but regularly).

      Helen: the BTSX compares the opening and closing price of the ten stocks each year and comes up with the % change. I don’t recall dividends being added to the mix.

      Reply
      1. Alternatives? Sure.

        The Trending Value strategy has returned 20%/yr for the last 50 years (back-tested and complex, but since it’s only the bottom line which matters, who cares, right?). Cornerstone Growth strategy gained 17%/yr with a much less complex and adaptable criteria/system. I’m sure you can find plenty of other long-term market beating strategies.

        This BTSX strategy is merely countercyclical investing but with unnecessary complexity. You could do all of this with index and bond funds and side-step the risk the aforementioned complexity brings (you’ll notice Grant has conflicting definitions of risk). As for my comments being “down”, should we really cheer on all guests simply because we like the host? I think not. Let’s be realistic and admit not everything shiny is great and true. Can see lot’s of sky through this patchy book and assume there is a lot of now non-applicable points, e.g. trust funds making up a good chunk of the historical returns.

        I’ve mentioned many times that there are 85,000 personal finance books available…this one is different how? In other words, stick with the financial pillars and skip the financial fillers.

        Reply
        1. SST: If one is capable of following and implementing the Trending Value strategy it sounds like returns may be good. But how many will have the time and knowledge to rate stocks as follows(assuming that’s that criteria):
          · Market cap greater or equal to $225 million
          · 6-month total return greater than median 6-month return of Russell 3000 index
          · Top 40% percentile rank of price to book value (lower value is better)
          · Top 40% percentile rank of price to sales (lower value is better)
          · Top 40% percentile rank of EV to EBITDA (lower value is better)
          · Top 40% percentile rank of price to free cash flow (lower value is better)
          · Top 40% percentile rank of price to earnings (lower value is better)
          · Shareholder yield greater or equal to 2%
          The nice thing I liked about the BTSX was it’s simplicity and that it does produce above market returns.

          Having said that, I dropped the strategy, as mentioned above for what I felt eliminated trading and used more specific criteria than just yield.

          Reply
          1. The BTSX is merely making concentrated bets on the top div payers, e.g. BNS has a ~5.75% weight in the index, BTSX will give it a 10% weighting, thus the dividend portion of the returns will be higher than the index — and that’s what “beats” the index.

            TV@20% vs BTSX@12%. Seems like 8%/yr is worth the time and knowledge to me.

          2. SST: you probably have the skills and time to follow such a strategy, I never did with any success.
            Beating the TSX or DOW works and is simple, but the rebalancing each year and only looking at yield turned me off.
            Some say you don’t have to sell or buy a stock but then your not following the strategy and then what?
            Anyway Ross is happy with the results so like others, if it’s working stick with it.

  13. Interesting concept. I suppose it is best implemented in a non-taxable account, such as an RSP. My questions: Does the book show the year by year results for each of the last 15 years? Are dividends the largest contributors to the annual returns?

    Reply
    1. I use this strategy in RRSP and non-RRSP accounts. As you suggested, It is easier to use in the RRSPs as no taxes are paid. The book shows the results, year by year, for 10 years, from 2004 to 2013. The 2014 and 2015 results were published in the Canadian MoneySaver. The dividends only account for approximately 4% of the return and the balance of the 11-12% return is capital gain.

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        1. I get the trading costs question often. The trading costs are minimal. In an average year I might have 3 stocks change. At $10/trade that is 3 x 2 x $10 = $60. Say you have the stocks in 3 different accounts (RRSP, TFSA, non-registered account) so you 3 times as many trades to do. That is $60 x 3 = $180. If you had a $500,000 portfolio that works out to 0.036%. If your portfolio is larger the trading cost % is even less significant. Remember, if you had a mutual fund charging a 2% MER, you would be paying $10,000/year for your $500K portfolio, year in and year out, whether they made money for you or not.

          Capital gains are paid in the non-registered accounts. I don’t find the capital gains hit that significant but I don’t have details I track on it. I find that some people get so hung up on capital gains taxes they don’t sell stocks when they should. Then the stock declines and their tax problem goes away because their gain is gone. Kind of silly thinking. If you have capital gains tax to pay, it means you made money and that is the point of investing. Sell and move on to the next opportunity.

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  14. “It is easier to use in the RRSPs as no taxes are paid.”

    Seriously?!? Someone needs to bone up on their financial education. This is the kind of mis-advice which leads people astray.
    RRSPs are a great tax tool for about 10% of the population. What’s the account strategy for the other 90%?

    “The dividends only account for approximately 4% of the return and the balance of the 11-12% return is capital gain.”

    Just as I suspected: “I wouldn’t be surprised if the dividends accounted for almost all of their winning margin.” ~SST
    Index return 7.6%; strategy return 11.2%; difference 3.6%.
    What’s the final difference when you account for fund pay-outs?
    What’s the final difference going to be once you pay tax on those RRSP withdrawals?
    I’m guessing a lot closer than 3.6%.

    Next.

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  15. SST – I am not sure why you feel it is necessary to communicate with such a worked up tone but I guess that is your choice. I will happily answer any questions you have. I am just sharing with anyone that is interested, what I have done and my results. If you have something that is simple to implement and gets better results than David and I have obtained, then that is great and you should use it. So far, this is the best system I have found that is implementable without spending significantly more time on the computer.

    Yes, dividends are included in the BTSX return numbers and they are included in the total index return numbers that I compare to. The gains of the BTSX are better than the index. With this strategy you end up with the higher paying dividend stocks out of the index and then live of the dividend payments. Management of the retirement portfolio is very simple because of that. I am always driving towards simplicity with my investing wherever possible.

    What is different about my book is that is “all” the information that I felt is necessary for my children to have a successful financial outcome, without going on for 1000’s of pages. It tells them exactly what I did, step by step, includes the simple to implement BTSX details. I provide my portfolio breakdown and the year by year results. I have read many financial planning books, like yourself, and have found that most of them touch the surface of many topics but never tell me all the details of implementing strategies, the results, and exactly the structure of their portfolios. I am not selling financial services, news letters, seminars, or have a web site. I am just telling my children, and anyone else that is interest what I did and how it has worked work. These factors make it quite different from what I have read. The cost of the book is $5.99. About the cost of a fancy coffee at Starbucks.

    In terms of the after tax issue, it all depends on each individual’s situation. RRSP, no RRSPs, TFSAs. Some folks are in lower brackets, others high. Some with have pension plans, and other income. I have structured my income, using all of these, so the income tax is quite low. There isn’t one easy answer for tax planning since every one is different. If you are getting a long tem average return of 11-12 % and then have to deal with the tax issues because your good gains, that is a good problem to have. 🙂

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    1. Personal and/or professional finance is not provided to the populace in the general education system, thus we must educate ourselves via books, blogs, etc. Why do I express a “worked up tone”? I guess it’s because so many people who push their publication under the guise of “financial education” get it wrong and do more damage than good (e.g. It is easier to use in the RRSPs as no taxes are paid).

      Here’s just a few basic questions I would like answered:

      What is the risk profile of a portfolio comprised solely of ten (10) Canadian stocks (stand-alone and vs. an index fund)?
      Is the TSX the correct benchmark for the average investor to gauge their portfolio?
      What portion of David’s returns were comprised of now-non-replicable income trusts?
      What is your net return after ALL taxes (RRSP is tax deferred, not tax exempt)?
      The average investor will not benefit from an RRSP structure; what will their non-RRSP net return be after all taxes?
      How does this strategy fare in all economic environments (e.g. not a 35-year decreasing rate market)?
      The BTSX strategy is basically countercyclical in nature, yet you invest only in North American markets, which are at the peak of global market cap. Why do you not apply the BTSX strategy on a macro level?

      I’m sure I have more, but I’ve got stuff to do.

      (“I have read many financial planning books, like yourself…” — I have not and do not read PF/FP books; I’ve probably read a total of less than five in my entire life. The PF blogs I visit mostly for entertainment value.)

      Reply
      1. SST: Not answering for Ross, but some of my opinions.
        ” I guess it’s because so many people who push their publication under the guise of “financial education” get it wrong and do more damage than good “. I think there is a lot of filler and rhetoric in most, but often there is sound advice and even common sense. It’s finding it and trying to apply it thats tough.

        “What is the risk profile of a portfolio comprised solely of ten (10) Canadian stocks (stand-alone and vs. an index fund)?” As most top 10 of an index comprise 70% to 80% of the index, I think one can compile a reasonable portfolio of 10 good stocks.

        “Is the TSX the correct benchmark for the average investor to gauge their portfolio?” I hold 17 Cdn of my 19 stocks (in all my accounts) with the TSX. Very happy with my results and the income it generates.

        “What portion of David’s returns were comprised of now-non-replicable income trusts?” Good question.

        “The average investor will not benefit from an RRSP structure; what will their non-RRSP net return be after all taxes?” Wish they had offered the TFSA much sooner, but RRSP was the only option for most. Problem is taxes will always be higher when withdrawing.

        “How does this strategy fare in all economic environments (e.g. not a 35-year decreasing rate market)? The BTSX strategy is basically countercyclical in nature, yet you invest only in North American markets, which are at the peak of global market cap. Why do you not apply the BTSX strategy on a macro level?” As I invested to generate Income during my investment phase and BTSX isn’t too far off, they probably fared quite well. The difference is I didn’t just buy based on yield or dividend increases.

        Reply
  16. How does this approach compare to a DGI Dividend Growth Investor approach? Wouldn’t regularly selling to rebalance have an impact on Yield on Cost which is what a DGI is depending on for long term growth of dividends as opposed to having to draw down investments at 3-4%/year?

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  17. Eric, If I am understanding you correctly, you are asking how does investing in a basket of dividend paying and dividend growing stocks compare to the BTSX approach? These are very similar strategies but the one challenge with the DGI approach is that you need to pick the stocks from a list of appropriate candidates. You would need to develop a strategy that appears to work. You then need a complementary strategy to determine when and if to sell any of the stocks. BTSX strategy helps to resolve both of these issues. For sure, someone could do better with a buy and hold dividend paying stocks depending on which stocks they chose. Certainly buying dividend growth stocks is certainly a good strategy if you can work out the details. Some people may only use the annual BTSX list as a reference list of stocks that they might want to add to their DGI portfolio.

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    1. “Some people may only use the annual BTSX list as a reference list of stocks that they might want to add to their DGI portfolio.”

      That’s what I do Ross. As you might already know by now, I’m a buy and holder long-term. Regardless if some stocks don’t make the BTSX list, if they’ve paid dividends for generations, I own them.

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    2. Ross, I am also wondering what the turnover of stocks in the portfolio is. How often do you sell? It seems to me that each time you sell a stock, you have to buy another and then start to build Yield on Cost (YOC) over again for that stock. The main aim of a DGI approach is to buy and hold so that dividends keep growing based on the YOC. Is this a disadvantage of your approach?

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      1. Ross – P.S. I agree that BTSX identifies good potential value stocks for purchase, but in my reading of the DGI approach (Lowell Miller – The Single Best Investment and those on Seeking Alpha), they say that they don’t care about matching or beating an index, as they want to see their dividends grow. They aren’t planning on drawing down capital, but rather are planning on basing their income or additional income on dividends which grow through holding their stocks. I have read your book. Just wondering how you would compare approaches from this perspective.

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        1. Ross, P.P.S. I guess DGIers see dividends as more “reliable or predictable” than capital growth. They judge that dividend growth from steady companies is a better way to increase wealth than the potential capital growth of the value of companies which is based on the market. BTSX sees that choosing the value “dogs” is a reliable approach.

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          1. I can speak for myself Eric, although it’s total return that ultimately matters, I feel there is a psychological benefit with dividends (you see the money come in) vs. hope for capital gains and there is a tangible benefit (i.e., bird in hand, cash you spend now) vs. hoping that management of the company you own makes the best decision for you.

            Thanks for your comments.

        2. Eric, just going by what you have here from Lowell Miller, there are some similarities. We both are big fans of growing dividend income. I just really have more of a combination of dividend income and capital growth. Remember the dividend income from the BTSX is what I live on, so I am not drawing down capital either. My total dividend income is growing at a rate greater than inflation so from a cash flow point of view I have a retirement income that is actually gaining more purchasing power as the years go on. That is the most powerful aspect of the entire system. The good capital gains growth is help to drive the income growth as well.

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      2. I’ll let Ross answer his approach, but for me Eric, I’m not concerned with YOC since it’s a poor metric. I am concerned with creating an income machine so I don’t have to work someday. I also try to avoid selling stocks. This creates fees and potentially unbalances the portfolio. That’s just me.

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      3. Hi Eric, Sorry I didn’t answer sooner but I was away for a few days. On average I would say I sell 2 or 3 stocks each year. BTSX is not a buy and hold strategy, but It is a strategy that directs you to specific stocks to buy and sell. You would have to compare a DGI’s portfolio over a long period of time to the returns of the BTSX to determine which is better. You have to remember that every time I sell a stock, I replace it with one that is paying a higher dividend so there is a dividend income boost there. As well, any dividend increases from the BTSX stocks that occur during the year, also contribute to an income increase.

        There are a few stocks that seem to bounce onto and off of the bottom of the list from year to year. Sometimes, rather than sell one of these stocks I will hold it in the “non-BTSX” part of my portfolio for a year or 2, in case it is added back on the list the next year. This way I avoid capital gains issue with it for at least a couple of years.

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  18. I also meant to comment on your question about the 3-4% draw down. I get this question a lot. Don’t confuse the issue of obtaining the 11-12% long term return rate with the issue of withdrawing income from the portfolio. Some people might be in growth mode and have compounded growth of 11-12% / year on all earnings and gains in their portfolio. Some others may be withdrawing funds, like myself. I still get the 11-12% average return on the money I have in there at the beginning of the year, but I then choose to withdraw 3-4% at the end of the year. Thus, in my particular case the portfolio is only growing at 8%/year due to my 3-4% withdrawals. Using these numbers you can see the portfolio is actually growing which will produce a growing retirement income from year to year. People that choose to keep all funds in there will see the full affects of the compound growth. I hope I have explained that clearly.

    Reply
  19. To SST:

    “What is your net return after ALL taxes (RRSP is tax deferred, not tax exempt)?
    The average investor will not benefit from an RRSP structure; what will their non-RRSP net return be after all taxes?”

    IMO, these questions are not relevant in that taxes will be different for each person and their unique situation. What may be a more relevant question is what is the nature or type of gain that is reported in a typical year? Capital gains, or dividend income or interest income? I’m guessing it may be capital gains and dividend income.

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    1. Taxation/net return is very relevant — continually paying cap gains tax on 20-30% of your portfolio — because it effects the advertized rate of return — the main selling point of the product.

      Reply
    1. Hi Rob, I have chosen December 31 so I can easily compare my returns to those tracked by the index and other major markets. It also allows me a quiet day on Jan.1st to work through the data. It is usually a cold day when I would rather be inside anyway.

      Reply
  20. Another low risk way to beat the index is to buy an index ETF that does securities lending. I don’t have the numbers off hand but it should add about 1% long term to the annual return. BTW I’ve never seen a blogger or investment site talk about this!

    Reply

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