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.
I’ve also suggested if you own an indexed Canadian ETF product, you can consider unbundling that fund while still obtaining a healthy total return.
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!
DIY investor Jason Fremlin is the author of a new book entitled The 6-Pack Portfolio.
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.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I want to win, because I want to get my investment options organized.
I have learned a lot since following this blog and reading articles, but still so much more to learn! I currently have just about $25K cash sitting in TFSA that I’m trying to figure out how to best invest, is it individual stocks, ETFs, or REITs. This idea of 6-pack or 12 is very interesting, and I would like to know more in detail since this is likely something I like to do. However, to diversify in U.S. and international markets, is TFSA a good location because of tax concerns?
I want to re-evaulate my portfolio. great blog btw!
Thanks Bran!
Sorry May for the type!
No worries. I do that all the time. 🙂
I like The 6-Pack approach, which is basically the DG approach with a different twist. Almost all the stocks in the Banking, Railroad, Utility, Telecom and Pipeline would be considered great DG stocks. Real estate might not fit as well, even the REIT’s. But I doubt one would go wrong using this approach.
Where I differ with the writer is getting excited about Beating the Market, especially since he’s only followed the 6-Pack since 2010, after the Financial Crisis when the market has been on a upward trend. Every strategy has done well since 2009, even Passive ETF’s. When the next correction comes, all strategies will suffer if one looks at Market performance or Market Value.
Also little, if any, mention was made of Dividend (Income) Growth which I feel is the key to a Simple to understand, Easy to establish and Long Term success strategy. When one concentrates on growing the income from their investments, than even during a correction they should see continued income growth and eventual capital recover and growth. They won’t panic, sell, feel uncertain of their choices and realize a correction is their best friend.
This is where I believe DG investing helps me with my financial psychology: “When one concentrates on growing the income from their investments, than even during a correction they should see continued income growth and eventual capital recover and growth. They won’t panic, sell, feel uncertain of their choices and realize a correction is their best friend.”
Agree with both of you. Seeing income growing while market down certainly made me less worried this year. But I still feel uncertain. I think I am not seasoned enough to equity market.
@ Nay: That’s life, looking back (as we are) it’s much easier to see what worked and didn’t. Fortunately for us Income investing worked and we now preach its benefits. We all have to find the path which makes us feel good as well as achieving our end goals.
Hi, cannew. Thanks for your comment. I do talk about or expand upon some of the stuff you mention within the book.. there is only so much information that can come up in an interview!
I do love dividends and dividend growth, and they are a key driver in the construction of this portfolio. The 6-Pack aims to have an aggregate yield of 4%. Low yielders like CNR make up for it with good dividend growth, and the aggregate yield can be pushed up by things like Pipelines.
I do have a chapter on Performance and mention that 2010 until now may not be a big enough sample size, and since then it has mostly been a bull market era. Therefore I did some backtesting since the year 2000, which shows similar results. Unfortunately I’m still (relatively) young and could only start investing in 2010 after I was done university.
@Jason: We’re not disagreeing on the stocks or your selection process, however, I think you will find that when you invest in solid DG stocks, reinvest the dividends and add to those positions when prices drop, your Yield On Investment will rise. You may purchase them at or around 4%, but as the companies increase the dividends your yield will rise also. Certainly current yield may remain the same, say you bought a stock yielding 3.5% and five years later, after several dividend increases, the current yield is still around 3.5%. That just means the price has gone up in line with the dividend growth. But your yield will be higher, that’s how one increases their income from their investments.
I’m always amazed at comments like” To get $40k from dividends you’d need $1Mil invested”. It shows that they don’t understand DG investing and compounding.
Again I’d ignore performance comparisons and concentrate on the Income generated by your portfolio. Let others feel good/bad by comparing themselves to the market.
sounds like an interesting book – would love a copy
The 6 pack example mentioned above has not only provided good dividend growth its also vastly outperformed the Canadian equity index. I can’t imagine any of the six disappearing any time soon.
Same Bernie. Own them all personally.
Mark, I ran the numbers this morning. Bet your 24 pack performances underperformed the 6 pack per the TD, CNR, T, FTS, TRP, CAR.UN example. My performance numbers pale inside the 10 to 15 year results shown below.
6-Pack Annualized Total Returns:
YTD= -1.05%, 1 Year= 7.38%, 3 Years= 10.46, 5 Years= 10.96%, 10 Years= 10.26%, 15 Years= 11.63%
TD is a great bank. But who knows about the future. Nobody expected what happened to Citigroup during financial crisis. It’s still far from recover ten years later. Holding multiple banks may have lower performance, but I would sleep better at night.
May, agreed anything is possible but you have to admire the track record of our big 5 over the past 150+ years. They’ve survived several wars, famines, plagues, recessions, depressions, financial crises, earnings misses, changes of governments, etc yet keep on ticking and paying dividends without fail. If uncomfortable with holding only one bank add one more. For the record TD, BNS and CM have never once cut their dividend. RY and BMO last cut in 1942.
Interesting, I didn’t know both of those cut their dividends then, I do know they have paid dividends for generations. I have contacted their investor relations departments and plan to update a previous post on that eventually.
Yeah, we own 7 CDN banks, I might hold less eventually.
I don’t have 10-year results yet but I will in 2020 since I really started the major changes to my portfolio in late 2010 around the same time I started the blog. For my CDN stocks, 5-years, average annualized returns are about 9.5% for non-reg. and about 7% for TFSA – since those accounts are the ones I have focused on since I started my dividend income updates. My TFSA has been brought down by various REITs including REI.UN.
https://www.myownadvisor.ca/dividends/
I would be thrilled with 10% over 10 years and close to 12% over the next 15 years…that would be outstanding.
I would go with the 12 pack. Max 8% in one holding. A 6 pack of abs or beer is fine – but not with stocks. Catchy title for a book though.
Mike,
I agree – but a 12 pack of beer beats a 6 pack any day 🙂
I love my craft beer – you’re making me thirsty!
I own a “24” myself and then some of CDN stocks. I really like the 6-Pack idea, and that’s for starters, but I believe Jason also thinks just 6 stocks long-term is could be better through a 12-pack or more for diversification and to reduce portfolio risk (with any one stock not performing as well in the future as historically done over many years or decades).
Mark, I agree with your comment with respect to volatility of performance returns but not if we’re talking dividend sustainability or dividend growth. I believe the six per the example have extremely strong dividend sustainability and dividend growth prospects. IMO adding more numbers probably weakens the overall dividend sustainability. There’s also outstanding Canadian market diversity there. I really like these six but I’d add one more, Royal Bank (RY), to make it 7.
I’ve been looking at revamping my overall portfolio to simply things so my wife can manage it more easily, ie; fewer stocks and greater global diversity with Mawer funds. Also some fixed income proxies.
I’m a big fan of RY as well and own a few hundred shares accordingly and always plan to DRIP this stock until I need the cash flow.
I know my wife really wants me to index more, or invest in more broad market funds to make things easier for her over time as well…I will likely hold less stocks over time and a few more ETFs. We intend to have a sizeable cash wedge ~ 1 year in cash always as we enter retirement and if we have pensions, that’s also fixed income so we don’t plan to own any FI directly because of that. We’ll see…plans can always change.
Mawer has some great funds but you know this already 🙂
I like this concept. If one does not wish to go strictly with ETFs, this seems like a nifty compromise. Decent chance that quite a few of the good stock holdings will also be in the top ten of most ETFs anyways. In the past I’ve looked at top ten lists just to get ideas of other companies to look at. I’m not a sophisticated investor in that I don’t analyse companies to the nth degree. If CPPIB and a lot of other ETFs hold the stock, then that’s a good starting point for me.
I think so too but I’m biased because this is largely what I have done, although I own more like a “24” (and just more) of CDN stocks and then I decide to own a few U.S. stocks and U.S. ETFs for extra diversification. I would agree with you…if the smartest minds in the ETF industry own the same stocks, it’s good enough for me to own directly 🙂
Once again, a good article with more ideas to fine tune my investing. Thanks
Completely agree on not to buy Canadian Index. I am not very comfortable to buy only 6 stocks though.
Same. That’s why I own a “24” or so! Cheers.
I’m down to 12 in banks, utility, pipeline and telecom. Feel really comfortable, in fact much better than when I held 30+ and some funds.
I hope I could be at the same comfortable level as you.
Interesting you feel better with 12 stocks than 30. I’ve got 30 CDN stocks and about 6 of those are REITs.
With a larger number of holdings we always seemed to have or feel some regrets as one went up while many others were going down (Yes we were watching price back then). Even when one increased the dividend we wondered which would be next and by how much. There always seemed to be some uncertainly about our holdings and a temptation to switch or make a change.
Now that we’ve concentrated to 12 we’ve settled into an acceptance of what to expect. We watch the income they produce and marked when the dividends might be increased. Most are fairly predictable and for the past several years right on target. We don’t try to guess How Much they will increase, just what our annual % increase might be (usually in the 8% to 11% range).
Interesting you say that because that is exactly my struggle now. CAR.UN doing great, REI.UN, not so much. This makes me think I will eventually trim back holdings to a lower number. Maybe eventually somewhere between a 12-pack and 24-pack for Canada and keep a 12-pack of U.S. stocks plus a few low-cost ETFs like VYM and HDV for income or VTI, VOO for growth. We’ll see. Not really decided yet.
Hi, May. It depends on how much capital you have. For those starting out, 6 stocks is fine. It can be expanded to 12 stocks with a larger portfolio, doubling up on stocks in each sector. I see no reason to go outside of the Bank, Railroad, Telecom, Utility, Pipeline, and REIT stocks in Canada though. This is the best of what our market has to offer!
I don’t know. I think some none dividend and low dividend stock is good too. Especially high tech is the future.
I really regretted that I did not buy any CSU when it’s around $700. Now it’s almost one thousand.
I agree having some tech is good. That’s why I recommend holding VTI or SPY for the US Market, which has its highest allocation as Technology with the big names — Google, Apple, Facebook, Amazon, etc. It’s very hard for the individual to pick the next winner, especially in Canada which has booms and busts in its tech stocks.
Thanks, Mark
Sounds like an interesting read. I’d love a copy of the book.
Great article. Love the blog. Investing can be overwhelming. Hope I win
Great post! I’m a new investor and am quite interested in this approach. I was wondering what the best approach to adding new money each year would be. For example, next year when I have another $5500 to add to my tfsa, do I add to the stock that has not done as well as the others or do I add to each stock equally in January? Is this an approach that I could start today or should I wait for a dip in the market?
Thanks!
JB
I can’t offer specific investing advice Jill, but I know for our own financial journey, I’m relying on a basket of 30 or so CDN stocks and about 10 U.S. stocks + low-cost ETFs to fund our semi-retirement plans about 5 years from now.
In our case, we max out our TFSAs every January (well, we try to) and then buy CDN stocks that have been beaten up in price where possible. Stocks like CU and EMA and ENB come to mind now. Will those companies keep paying out their dividends long-term? I hope so but you never know but I have confidence they will continue to reward shareholders.
Therefore, “…is this an approach that I could start today or should I wait for a dip in the market?” I wish I knew the answer. All I know is, the best time to plant a tree was usually yesterday. So, when I bought my stocks years ago I wondered the same question. In hindsight, years later, I’m glad I made those lump-sum buys.
This article might help?
https://www.theglobeandmail.com/globe-investor/investment-ideas/lump-sum-investing-vs-dollar-cost-averaging-the-nitty-gritty/article20707395/
“Dollar-cost averaging also gets you moving – you’re no longer idling on the sidelines watching the stock markets move higher without you. The more gains you miss out on, the greater the risk that you’ll give in to regret and buy at a market high.”
Hi Jill, great question. I mention in the book that if your portfolio is large enough you can expand the concept to a 12-Pack Portfolio, with 2 stocks in each sector (i.e. both Telus and Bell for Telecom). In that case, one could expand from the 6-Pack to the 12-Pack gradually by adding 1 or 2 stocks each year with their contribution room plus any extra dividends. Otherwise, you could just add ~$1000 to each stock every year, adding more to the ones that have not done as well like you say. That may not be the most efficient path when considering stock commissions though.
I also was considering your question about buying now versus waiting for a dip in the market this year. I was setting up the 6-Pack Portfolio for my wife, and ended up buying everything in a lump sum. The stocks are up since then, so it worked out well. Even if it didn’t, I think getting invested as soon as you can is the best strategy for any long-term investor.
I like the idea of “unbundling” ETF. It makes sense, if you know what to choose from!
Great work mark. Keep the information coming sir . Thanks
I love your blog and now especially with a free giveaway!