Canadian stocks to buy and hold

Let’s face it – stock picking – as those indexers tend to call it can be risky business, risker business than indexing at least.  What I mean is the premise behind index investing is academically sound and has some benefits over dividend investing:

  • Indexers can obtain market returns less minuscule money management fees.
  • Indexing helps take the emotions out of investing.
  • Indexers can get vast diversification, using index funds to own thousands of companies around the world.
  • Indexers can simplify their investment portfolios, using three or four funds, index investors can invest similarly to major pension plans – they can have equity domestic and foreign components, and a fixed income component.

I recall investing guru and all around good guy Preet Banerjee wrote some time ago in an article “index investing and dividend investing both have cult-like followings” – how true – but these cults have more in common than differences.  Dividend investors thinking and acting long-term are not unlike their rival tribe.  Much like indexers dividend investors:

  • Tend to buy and hold assets, and do not (should not) trade, and
  • Tend to buy assets in different sectors for diversification over time.

Dividend investors can benefit from the psychological upside that comes with dividends, cold hard cash coming into their pocket stops them from turning into panic-stricken sellers when the market corrects or crashes.

To be honest, I think these strategies can co-exist, in blissful harmony (at least they do in my portfolio).

When it comes to Canada’s stock market, I believe you can select proxies from various Canadian sectors and use those top-stocks to buy and hold for your dividend income portfolio.  After those stocks have been purchased, you can then passively invest like Preet recommends – index invest using low-cost Exchange Traded Funds (ETFs) to hold U.S. and international equities from around the world.

How would that look?  Let’s look at some scenarios for your portfolio.

Own the biggest Canadian REITs

Using iShares XRE as an example, the top-5 holdings are:  RioCan, H&R REIT, Canadian Apartments, Smart REIT, and Canadian REIT (REI.UN, HR.UN, CAR.UN, SRU.UN and REF.UN respectively).  Last time I checked those holdings comprise over 60% of the assets in this ETF.  By owning these top-holdings, this is largely a proxy for all Canadian REITs, so as these companies go so will this ETF and this sector.  You can save yourself >0.60% MER by owning the stocks directly.

Own the top Canadian banks

Using iShares XFN as an example, the top-10 holdings are:  6 major banks, 2 major insurance companies and a few other large integrated financial companies.  Last time I checked those holdings comprise over 80% of the assets in this ETF.  By owning those companies directly, they are a proxy for our domestic financial industry.  How these financials perform long-term will likely dictate how well your Canadian portfolio will perform – Canada’s equity market is comprised of almost 40% financials.

Own Canada’s biggest utilities

Using iShares XUT as an example, the top-5 holdings are:  Fortis, Emera, Canadian Utilities, Brookfield Renewable Energy, and ATCO (FTS, EMA, CU, BEP.UN, and ACO.X respectively).  These stocks make up close to 70% of this ETF’s assets.  Unless you want to speculate more, you don’t need to look much further for Canadian utilities beyond these holdings.

Own the Telcos you love to hate

You know the names so I won’t list them.  “Robellus” all pay tidy dividends, might as well be an owner of what you consume!

There are other stocks worth considering, such as Enbridge who has paid dividends for 63 years and TransCanada, who recently increased their dividend again, and other factors to consider, but I think you get the idea by now.  By researching the top holdings in Canadian sector ETFs you can start building a solid domestic dividend income portfolio over time and go on to use worldly low-cost ETFs to build around these stocks for essential portfolio diversification.

What do you make of this strategy to buy and hold Canadian stocks and then index invest almost everything else?

44 Responses to "Canadian stocks to buy and hold"

  1. I like Vanguard’s VDY as my dividend paying bank ETF. It has more than 60% in financials. Good dividend and it is not popular so I got most of my shares for under $30. I am not sure why it is not incredibly popular but it keeps paying me a monthly dividend so I will keep it for decades to come.

    1. I think VDY is an excellent product Beth. You pay very little to own this ETF as well. I recall the top-10 holdings compromise about 60-70% of the funds assets – all big-5 CDN banks, a few telcos and some life insurance companies. There are only 3 worth owning in Canada for the latter: SLF, MFC and GWO (or POW/PWF).

      You will be rewarded owning VDY for decades to come. Smart choice.

      1. While VDY is probably the best I’ve seen, the .23% MER is still expensive for what you get – especially for large portfolio amounts. Buy and hold 10-15 stocks at $10 per trade vs $230 / year / 100K.

        Also, VDY carries 16% in oil and gas whose cyclical tendency will make the ETF volatile.

        1. I think VDY is a great product but you can own the top-10 or 15 holdings directly and basically get the same return with no money management fees and higher yield/cash flow. That said, for those that are at all fearful of individual stocks – VDY is excellent.

          1. VDY: 47% of portfolio in Bank stocks, and I thought I was high at 21%!

            Another 20% in cyclicals, &another 20% I’d never want, and they only want .23 me &.20 met fee

            I’ll stick to just the dividend growth stud I want.

          2. I think like you that owning the top 10 is better but when you are starting to invest, I find VDY excellent to get the diversity when you don’t have enough cash to buy the stocks directly with the trading fee.

  2. re: “By researching the top holdings in…ETFs…”

    The reason to allocate your savings into index funds is to capture the most of the market return as possible (with as low fees as possible). Buying the individual heaviest weighted stocks of an index fund allows you to invoke the Pareto principle — 20% of the holding give 80% of the returns (e.g. in a recent year, something like the top 12 stocks in the S&P were responsible for well over 50% of its growth; forgive the lack of specificity).

    The indices and the inclusion of all constituents are governed by rules, meaning a company has to meet certain criteria before it makes the cut. Using the S&P, for example, all constituents pass the mark, but there’s a massive difference between Apple Inc. and California Resource Corp. Due to weighting, even moonshot stocks like Netflix or Amazon add very little return to the index as a whole, even though their individual stock price has crushed the index (would you buy a P/E 300 stock?!)

    You don’t have to be the next Buffett to pick stocks, let the index managers do all your heavy lifting, then simply buy their top choices instead of all their choices, regardless of their dividends.

    Now the downside — Nortel, Valeant, RIMM… Following the above advice would stick you with these kamikaze companies. That’s the power of an index fund, you don’t reap the massive rewards of the underweighted, but you don’t get crushed by plummeting heavyweights. (Interesting side note: according to most recent data, #3 within the CPP, Valeant’s 90% drop has cost each Canadian about $20).

    My strategy for the average investor might be just the opposite: buy index funds and ETFs first, then bolster with individual holding of the strongest index components (in appropriate allocations, e.g. <5% of your money in Canadian assets). You end up with fewer individual stocks to keep track of and less individually allocated capital than doing the reverse.

    1. Thanks for the detailed comment.

      Yes, there is Pareto principle in effect here. I figure if you’re going to invest in individual stocks at all, let the mutual fund and index fund managers do the work for you. Otherwise just buy the index and hold the index.

      As for the downside, for sure there is risk, however, I prefer to avoid investing in technology stocks. Great growth potential but with great growth comes great risk. I also don’t invest in any company that doesn’t have a long, established history of dividends. Preferably 20+ years of history and where possible, buy companies that raise their dividends every year. This helps avoid buying and holding any kamikaze companies. Of course there are never any guarantees with investing – but my approach by buying and holding the top Canadian stocks in the funds, and indexing everything else, is helping us realize our financial objectives. In the end, that’s the key.

  3. Thanks for the article Mark. I enjoy individual stock purchases of the best Canadian stocks And with ETFs to compliment the portfolio. I think this hybrid approach is a great way to go for our portfolios.
    Hope you’re having a great weekend with the family bud. Cheers.

    1. Thanks for the visit. I’m enjoying reading your journey as well. I believe in my hybrid approach and it’s meeting our financial objectives. Enjoy the rest of the weekend!

  4. I’ll throw in another two discontinued pennies….

    One of the more agreed upon points in (successful) investing is to have a strategy and stick with that strategy through thick and thin. There is a danger of paralysis if you keep comparing theories etc., at some point you have to pull the trigger — be it divs, index, hybrid, monkies with darts. Choose not what’s best, but what’s best for your personal situation, then give it time to play out (aka don’t flip flop every six months).

    1. Thanks SST. For my small investing brain, dividends work. I look forward to getting paid more in another week or so as the end of the month draws near. I’ve stayed the course for the most part for the last 5+ years and I don’t intend to change or trade much in the future. I simply want to find a way to gambit more, for more U.S. assets but I need to save enough money in the RRSP first. We save, we invest and spend and live our life with what’s leftover. So far, so good.

  5. I don’t buy indexes but closed-end funds for any stock and bonds I would not buy individually, like the ones in the US (because of our poor loonies) and Asia markets.

    It’s a way to have some exposition.

    So the hybrid index / dividend is OK too in my 2 cents POV.

  6. Hey Mark,

    I guess if you’re really convinced that dividend investing is the way to go, this is a good strategy. As SST mentioned, the key is sticking with the same strategy long term and not playing with it. I believe dividend investors can do really well for themselves in the long run.

    Personally I’m straight index investing with a balanced portfolio, and I think even what I hold now might be a bit overly complicated (it’s based one on of CCP’s legacy portfolios before he simplified everything).

    Which brings me to a couple of things to be aware of with the “proxy holdings” concept.

    1. Buying ETFs is free (with some brokerages like Questrade). Buying individual stocks on a regular basis is $10/trade, which can really add up if you’re buying frequently, so it’s important to do the math.
    2. This could be a rebalancing nightmare…
    a) …if you’re trying to keep individual weightings balanced as well (which you probably should considering SST’s comments on Nortel and friends), and not just rebalancing each category…
    b) …and if you’re treating all of your accounts as a single portfolio; the complexity is multiplied by the number of accounts you’re managing. The complexity is lessened with a good rebalancing spreadsheet, but I find it pretty complicated even with just 8 ETFs across 4 accounts!

    Just my contribution to the pile of pennies already accrued from the previous comments. ?

    1. I am Tim. Like I’ve mentioned to other readers on the site (thanks for your comments by the way…), I feel the cash coming in is a positive reinforcing agent to stick with dividend investing and then surround those stocks with long-term growth assets like Vanguard’s VTI.

      Your reminders are good Tim. When it comes to your points:
      1. I only buy my stocks about 10 times per year. That’s cheaper than my favourite 6-pack of beer each month.
      2. When it comes to rebalancing, I tend to buy the lagging blue-chip stocks. I’ve been buying REITs and Brookfield assets this winter. Yes, we treat all accounts as a portfolio and I’m actually looking to simply things more going-forward, likely no more new individual stocks other than U.S. healthcare companies. 30-40 stocks is plenty for us. Everything else is in 3 equity ETFs.

      I appreciate the contribution and write back when you can.

      1. 1. Buying ETFs is free (with some brokerages like Questrade). Buying individual stocks on a regular basis is $10/trade, which can really add up if you’re buying frequently, so it’s important to do the math.

        Most people are re-investing the dividends which are done at no cost. I recently did some tax loss selling and while it cost me $20 in commissions so that was money well spent.*

        2. This could be a rebalancing nightmare…

        That is very true. For myself rather than re-balancing per se I tend to focus on harvesting profits and re-investing those into other undervalued stocks. For example 2013 was a great year for dividend stocks and I took my profits (too soon I might add) and rolled them into REITS. It was complicated but I managed to avoid having to send a cheque to the tax man which always feels nice**

        * technically I deferred the taxation as when/if I do sell those stocks down the road I will owe capital gains tax on them
        ** in this case I had other losses that offset money that I would have owed. I made nearly 15,000 in profits but managed to avoid taxation on it but it was tight. I know put a lot more thought into tax planning than into trading profits.

        1. I agree with 1. I try and re-invest dividends wherever possible for future income and growth.

          That is the biggest challenge I find with buying and holding stocks, how and when to re-balance. I do my best to look for undervalued stocks in undervalued sectors. The O&G industry right now is a good example. I am very tempted, soon, to buy more SU, CNQ and other O&G assets.

          Thanks for your comment.

  7. Hey Mark,

    This story you tell is a real inspiring idea! I like the idea to mix dividend investing and indexing, for the reasons you quote. The dividend allows to obtain some solid cash flows.

    I will think about applying this to my petsonal belgian situation. It might be a great way to obtain some passive income that makes my FIRE effort visible.

    1. This is my bias since the cash flow coming in is growing every month and I can see how this cash flow (from dividends) will allow us to spend that and avoid touching the capital/allow us to deplete the capital on our own terms in another 10-15 years. I suspect as my thinking matures I’ll even own some bonds/fixed income again, but not right now or anytime soon.

      Thanks for your comment 🙂

  8. I am doing exactly as your article suggests. For the Canadian market, it makes much more sense to hold individual stocks. For US and international, I hold ETFs.

    The other downside to using an ETF for the Canadian index is they hold about 35% in resources and materials – that’s really out of proportion compared to other countries and is a sector I’d prefer to have minimal exposure to.

  9. I like the hybrid approach. XUT is commission free on Scotia iTrade. Others are not. I bought a couple of XMD with my dividends from individual stocks before, because it was not enough to do DRIP.

  10. I’m not married to any one investing process other than to just keep investing. ETFs, individual stocks, CDs and even some GICs. I’m fine with any or all of them. Moving some cash around today in fact and re-invested in some stocks and some ETFs. Nothing new, just adding to existing.

    1. Another great product Mike. No issues with ZLB as a long-term buy and hold. I simply like to hold my dividend paying stocks for cash flow. I will need it in about 10 years.

  11. Here’s my situation as a Canadian mid-career investor, thought I’d chip in if it’s of any interest. I own a blend of dividend paying/dividend growing stocks + index etfs (all equities). About 3/4s of the portfolio is North American (50/50 US/Cda), 15% EAFE, 10% EM.

    My general target is to have 50% in individual stocks & REITs, & the other 50% in ETFs (generally passively indexed with no MERs over 40bps). The portfolio is in the 6 figures with a long-term view, and generates a 3%+ yield.

    I think this balance between individual dividend stocks and ETFs works well for me. I’m not trying to be a stock picker/timer (my portfolio has a very low turnover except for an annual rebalance between sectors), but I also don’t want to pay higher mgmt fees than necessary and my personal tax rate is a factor.

    -My Cdn holdings are almost all individual stocks & REITs (businesses which I feel I understand and services that I use).
    -The portion of my US holdings (which are in USD and held within RRSPs) are individual stocks, but I also have CAD-denominated TSX-listed US market etfs which are in non-registered accounts.
    -I avoid holding individual technology and health/biotech companies (rely on VGT and VHT for exposure instead) as I find company performance in these growth sectors can often be just a little too wild for my liking.
    -I hold XEF and XEC passive index funds also in non-reg accounts to achieve the EAFE and EM exposures.
    -I use a discount broker that does not charge fees for etf purchases to allow for smaller cost-effective investments throughout the year.

    While I believe in and follow the dividend growth investment philosophy and understand that dividends are key to total returns, I do appreciate the volatility-smoothing effects of indexed etfs. From an investor behaviour perspective, I find it’s much easier to hang on to a plunging index etf (and wait for the inevitable rebound) than to do the same for an individual stock that hits the skids (for any myriad of underlying reasons which may or may not reflect financial fundamentals).

    I really enjoy reading your website; thanks for all of the thoughtful content and comments!

    1. Thanks for the detailed comment Shel.

      As you might already know, I own a blend of dividend paying/dividend growing stocks + index etfs (all equities as well).

      I hope to get to about a mix of 50% stocks and 50% ETFs. That should churn about 4% yield eventually.

      You are like me then: “My Cdn holdings are almost all individual stocks & REITs (businesses which I feel I understand and services that I use).”

      Over time I will simplify my portfolio but for now I gravitate to CDN and US stocks and a few ETFs like VTI.

      I’m also learning (rather behaving) better when it comes to indexed ETFs. It’s taken some time but I’m coming along 🙂

      See you here again soon.

  12. I guess this is a good advice for a conservative investor, who is risk adverse. I’m not one of those and I’m heavily invested in the Canadian mining sector through individual stocks – and yes I also own many companies considered penny stocks. This sector has been good to me over the years, and while I lightened up my exposure during the metals bear market, I’ve invested a lot back towards the end of last year which was a very good move in retrospect. I’m booking solid profits now and I’m waiting for the next good entry point.

    I wouldn’t invest in REITs at this point with this super-inflated commercial and residential real estate.

    1. I used to own penny stocks but got burned Jason. Now, it’s dividend paying stocks or indexing – that’s it! I own a few REITs and those are long term holds for me. Thanks for reading.


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