Benefits of The 6-Pack Portfolio
Long-time fans of this site will know I love investing using a basket of dividend paying stocks for many reasons. I mean, who doesn’t like rising income over time?
In recent weeks I earned a 3.9% pay raise from Canadian Apartment REIT and I was the recipient of a 4.4% dividend raise from Sun Life, beyond the dozen or so dividend increases we already received this year. These increases have occurred at a time when, for the 2018 calendar year to date, the TSX Composite Index was basically flat.
In previous blogposts I’ve suggested Canadian dividend stock selection can be made easy, although dividend investing is definitely not without risk.
On the subject of index investing, using Exchange Traded Funds (ETFs), this approach has become very popular over the last decade. Rightly so, because of these advantages:
- Low money management fees
- Market-like returns by being the market versus trying to beat the market
- Long-term growth potential by staying invested
- Diversification by owning hundreds if not thousands of stocks from around the world
- Simplicity and transparency.
These are great things when it comes to investing.
However, I believe there is a case that can be made for portfolio concentration over diversification when it comes to investing in Canada. Why? Well, for starters our Canadian economy operates as an oligopoly – there exists just a few players that have huge market shares within a few industries. Secondly, by owning these Canadian blue-chip companies directly you can earn a healthy stream of income. Like I mentioned above – who doesn’t like cash flow?!
A very wise (and very wealthy) investor who is more eloquent than I am said this about dividend investing:
“The crux of your success will be selecting leading companies’ stocks and then holding on to them for many years. While you cannot go to sleep, and there is a place for monitoring, there is no reason to panic if a firm has earnings that fall short in a given year or two. This is quite a normal phenomenon.” – Stephen Jarislowsky, The Investment Zoo; author, billionaire businessman, philanthropist.
Recently, I got a chance to talk to someone who shares a similar investment approach – and he did me one better than a few blogposts on this subject – he wrote a book about it!
Jason’s book about creating your own 6-Pack Portfolio with Canadian stocks (and index investing beyond that for U.S. and international markets) is a strategy I incorporate (although my Canadian portfolio is more like a “24” with many stocks.)
Jason was kind enough to take some time with me to talk about this 6-Pack Portfolio approach, his thoughts on the Canadian stock market, how he invests in it, and more. At the end of this interview, you’ll see I’m giving away a copy of The 6-Pack Portfolio – so make sure you enter for your chance to win!
Jason, welcome to the site – thanks for doing this interview.
I was excited when you reached out to me for the interview, Mark. Happy to be here!
Let’s start with an easy question out of the gate – why write the book? What was the inspiration?
As you mentioned in your introduction, index investing with ETFs has become ever-more popular over the years. So much so, that it dominates online conversation as the go-to strategy for Canadian investors who want to do it themselves.
The problem with this is that the Canadian stock market index – the TSX Composite, is terrible. It is poorly diversified, with most of your investment going towards either Financials or the cyclical Mining and oil & gas sectors. Why not focus on the kind of stocks that work best in our country?
Enter the 6-Pack Portfolio, essentially my investment strategy since 2010/11. It has outperformed the TSX every year since, at an average of 8% annually! I have written about this portfolio online (i.e., Canadian Money Forum) and talked about it in-person with people over the years, always to positive feedback. I also enjoy writing and helping other people with investing – so a book was a natural approach to reach a wider audience.
What’s the concept behind the 6-Pack Portfolio?
The concept for the 6-Pack Portfolio is an equal-weight selection of six stocks in the following industries – banking, railroad, telecommunication, utility, pipeline, and real estate.
For example, an investor with $60,000 could buy $10,000 each of TD Bank, CN Rail, Telus, Fortis, TransCanada, and Canadian Apartment Properties REIT representing those sectors.
Compared to the TSX Composite, the 6-Pack has a higher dividend yield (everyone loves income) and has had both higher capital gains and lower risk (as measured by its fluctuation). What’s the catch? There isn’t one, really. I believe it’s just a flat-out better way to invest your money.
How can investors implement the 6-Pack Portfolio? How do you invest?
I realized this while writing the book, that readers could be at any stage of their investment journey. Whether somebody is just starting out and doesn’t yet know how to open an investment account, or if they are a seasoned investor looking for a better strategy, I try to accommodate readers across the spectrum.
One of the first considerations investors should make is the tax-implication of their strategy. So long as one has contribution room available, the 6-Pack is best in a registered account (preferably the TFSA for tax-free dividends). You can open the account type(s) you need at an online brokerage. For those just starting out with less than ~$25,000, Questrade is a good place to go. Otherwise, you may prefer the convenience of your big bank brokerage. I use RBC Direct Investing, with no complaints.
After you’re all set-up, buy equal amounts of your chosen stocks in each of the 6-Pack sectors, sit back and collect the dividends!
What about U.S. and international diversification? Furthermore, what would you say to index investors who believe in total returns using a handful of low-cost ETFs to invest?
I’m a big fan of diversifying into the U.S. market – you wrote about that above. Doing so offers the perfect complement to the Canadian 6-Pack Portfolio in terms of sectors. You’ll notice that the 6-Pack doesn’t include any technology, healthcare, or consumer stocks. One of the reasons for that is that the options in Canada are limited, but the USA has the big names we all know – Amazon, Google, Facebook, Johnson & Johnson, etc. that make big profits.
My recommendation here is actually to own the U.S. index, either with a low-cost ETF that tracks the S&P 500 (like ETF SPY) or using a broader index with Vanguard’s low-cost ETF VTI. The main reason for that is the U.S. market is more efficient and much harder to beat than the Canadian market – most fund managers fail. As Canadian investors, we can more easily follow our local companies, and save the time and trouble of following events down south by just owning their index with one fund. I also avoid international stocks and would recommend gold instead as part of a stronger overall asset allocation. I realize that may be controversial, but you can check out my reasoning in the book!
As to your final question about low-cost ETFs…I would say to these people that I would agree with this strategy, except replace whatever ETF Canadian stock market exposure you have with individual stocks (i.e. the 6-Pack Portfolio). I know you have already done this and continue to invest this way Mark!
You bet. So Jason, I also exchange my U.S. dollars for free (well almost). Can you tell readers about that strategy we employ from time to time?
This is an interesting one – because I assume most people who follow the “pulse” of Canadian investment strategy online will instantly know the answer. But when talking to the average Canadian, nobody knows about it and most people willingly pay extortionist (and usually hidden) fees to exchange CAD for USD and vice versa.
If you don’t know, Google Norbert’s Gambit and you’ll get plenty of instructions and examples. The basic idea is to exchange between CAD and USD at perfect rates using arbitrage on stocks that are on both Canadian and US exchanges (TD, RY, etc.). Or you can do it using an ETF tool called DLR. All you will really pay is commission for a couple stock trades (~$10-$20) rather than hidden fees that can end up being in the hundreds (or thousands) of dollars over time.
With (almost) free US dollars other than the commission costs you can buy some of my recommended ETFs (VTI, GLD), or go on a trip to Vegas or whatever.
What’s your game plan for retirement Jason? Do you have words of advice for investors out there?
I should be able to build up my TFSA to a million dollars with the 6-Pack Portfolio inside of it, that’s the priority. If I can do that (and I believe I will over many years of investing), at 4% yield that’s $40,000 income per year tax-free. Anything else (U.S. Stocks/Bonds/Gold) in my RRSP or non-registered accounts is bonus.
Words of advice? Reaching your financial goals boils down to three steps: 1) Earn Money, 2) Save Money, and 3) Invest Money. So long as you are doing well with the first two steps, don’t stress too much over the third step. Pick a simple, effective plan and stick with it!
Many thanks Jason for the book to giveaway and this interview.
As promised, enter to win a copy of The 6-Pack Portfolio below or click that link to buy the book!
Stay tuned for more interviews, books to giveaway and much more in the weeks and months to come. As always, thanks for being fans of the site.