How to Beat the TSX (BTSX)
Ever growing income. Beating the index. Sounds like fiction, right?
This is how you Beat the TSX in today’s post.
The long history of how to beat the TSX (BTSX)
Many years ago, I had the pleasure of interviewing Ross Grant, about his book, his writing gig at Canadian MoneySaver, and for the purposes of this post: his investment approach including Beating the TSX (BTSX).
You can check out that older interview here.
For those that don’t know or haven’t heard of Ross, he is another early Canadian retiree who helped amplify the BTSX approach pioneered by Dr. David Stanley.
Over the years, Ross has stepped back from writing books, articles for Canadian MoneySaver and more – but thankfully Matt Poyner from Dividend Strategy carries on the BTSX content and mantle – very comprehensively and prolifically I might add!
(I’ll provide a link to Matt’s outstanding site below.)
I’ve gotten to know Matt a bit over the recent years, and I figured Matt would be “the guy” to talk to when it comes to BTSX, how it remains very relevant for investors if not more so now than ever before, and how more importantly this approach can apply to your financial independence future.
Matt, welcome to My Own Advisor and it’s great to connect again.
Thanks so much, Mark. It’s clear we’re both passionate DIY investors who are here to help other Canadians.
Matt, for those that don’t know about you, your bio, background story…how did you get started with investing?
Happy to share, Mark. My background is painfully ordinary – I was no teenage stock market prodigy. I started with mutual funds in my mid-20’s, but like most DIY investors, the high fees, poor performance and finance industry conflicts of interest got me looking for a better way. It didn’t take long for me to fire my big-bank advisor and move all our money to index mutual funds – ETFs weren’t really a thing yet and I lacked the confidence to buy individual stocks.
Then I came across a series of articles published annually in a small Canadian investing magazine called Canadian MoneySaver (see above!) that built a portfolio of blue-chip dividend-paying stocks using a simple, evidence-based method that even I could understand as an annual investor. The method as you well know was called Beating the TSX and the author, David Stanley, a professor at the University of Guelph, had been diligently recording the performance of the method for about 20 years. As discouraged as I had been at paying 2.5% annually for high-fee mutual funds, BTSX had been beating the index by about that much on average for twenty years.
I started using Beating the TSX to select dividend-paying stocks for the Canadian portion of my portfolio and haven’t looked back. It has continued to outperform the index for over 30 years and has helped many Canadians achieve financial independence faster than they otherwise would have.
No doubt! Let’s dive into BTSX. As an introduction, what is the BTSX strategy for those that might not be familiar to it. Why does this approach work so well?
Beating the TSX is based on the Dogs of the DOW strategy in the U.S. but has performed much better up here. Here is the method in a nutshell:
- List the stocks on the TSX 60 Index by dividend yield.
- Select the top ten yielding stocks.
- Purchase these stocks in equal dollar amounts and hold for one year at which point the list is regenerated and the process is repeated.
You might think that this method results in a lot of buying and selling, but it doesn’t for two reasons. First of all, most investors who use the method will hold stocks that have dropped out of the top ten as long their dividend appears safe. They’re usually off the list because of price appreciation and are still great companies to own. Second, the BTSX list is remarkably consistent with only 3 to 5 of the holdings changing year over year.
Why does it work so well?
I’ve thought a lot about this because the results really are quite good. I think there are a variety of reasons.
First, research shows that dividend-paying stocks outperform non-dividend-paying stocks by a wide margin. According to research by RBC, since 1980 Canadian dividend-paying stocks have had average annual returns of 9.1% vs. only 1.2% for non-dividend-payers.
Second, among dividend stocks, there is evidence showing that both yield and dividend growth are indicators of superior long-term returns. Most BTSX stocks tend to display both of those characteristics: high-yield and good growth.
Third, and perhaps most importantly, the Beating the TSX method accesses the value factor. Value has been shown in academic studies to be a robust predictor of long-term outperformance. BTSX does this because the method is based on dividend yield: as stock price goes down, yield goes up. Beating the TSX investors, therefore, tend to buy companies when they are on sale.
I’m with you Matt, and I think the third factor is the most important. As yield inches up, it’s a bit of value play and signal that prices are depressed which can be a great time to buy.
I recently wrote about dividend-paying stocks, as a hedge for inflation protection.
Do you feel the same way? Why might BTSX stocks in particular help investors fight inflation?
I enjoyed your article, Mark. Inflation is on everyone’s mind. I think the best hedge against inflation is the ability to earn more money. You can do this by working more or by letting dividend-paying stocks work for you. This is where dividend-growing stocks really shine, and many of the blue-chip high-yielding stocks in Beating the TSX are also dividend-growers.
Take 2021 as an example. The total dividend yield at the beginning of 2021 was a generous 6.13%. If you were lucky enough to have $1 million evenly invested across those stocks, you would have enjoyed a passive income of $61,300 for the year – not too shabby. With the dividend increases, however, that income rose to $66,400 = a 9% increase. That’s $182 of income every single day for doing nothing, income that increased more than inflation.
Over the last ten years, 73% of BTSX stocks have raised their dividends in any given year, 21% held steady, and 6% cut their dividend. As unpleasant as dividend cuts are, they are rare and potentially avoidable by passing over stocks without a long history of consistent dividends. Another Canadian dividend personality, Henry Mah, has a book entitled Your Ever Growing Income. That sums it up well, I think.
I believe you’ve included a review of his book and interviewed him as well.
(Mark, I have! I’ll provide those links to readers below as well.)
Henry is passionate dividend investor for sure – I’ve also enjoy seeing his passion in those books.
Matt, I believe BTSX can also be a very tax-efficient way to invest – can you help explain?
Dividends can be extremely tax-efficient because of something called the Canadian Dividend Tax Credit. This is essentially a government incentive to invest in dividend-paying companies.
Say you have a couple who want to draw $100,000 from their investments per year. If each of them received $50,000 in bond interest, after paying income tax, they’d only be left with about $78,600. If that money was taken as capital gains, they’d be left with about $94,600 – not bad. But if they each received $50,000 in dividends, their total tax bill would only be about $1,200, leaving them with $98,800. That’s $4200 more than what you’d get from taking capital gains. I don’t know about you, but I’d rather see that money in my account than the government’s!
In non-registered accounts, dividends are always more tax-efficient than regular (interest) income and are even more tax-efficient than capital gains with an income under $100,000. In registered accounts, it’s the total return that matters.
Some of the tax efficiency, vis-a-vis compounding, could be lost in non-registered accounts if there is a lot of turnover. That is a big reason Beating the TSX investors tend not to sell good dividend-paying companies just because they drop off the list in a particular year.
I’m one of them Matt, I buy and hold and hold these BTSX stocks myself – and have clobbered the TSX in the process. That said, total returns matter, the sum of dividends and capital gains, year-over-year.
What’s your take on the dividends vs. indexing debate?
Then, diving deeper: how do you invest Matt? Do you believe in both dividends for ever growing income along with the hope for capital gains from ETFs?
At the end of the day, it’s all about total returns for sure, Mark.
It is a myth that, beyond favourable tax rates, dividend distributions are fundamentally superior to capital gains “distributions” (i.e., selling stock that has appreciated in value). The evidence for this goes all the way back to a 1961 paper by Miller and Modigliani, and is generally known as the “Theory of Dividend Irrelevance”.
I welcome the dividends vs. indexing debate. Listening carefully to the criticisms of dividend investing made by intelligent indexers has made me a much better investor. Frankly, there are a lot of dividend investing myths that have been perpetuated, ideas that sound good in theory but don’t stand up to scrutiny. The irrelevance of yield on cost is one that comes to mind. (Mark: agreed.)
I believe in evidence-based investing. There is a ton of evidence that index investing is incredibly effective at capturing risk-adjusted returns. It is also so simple and easy that almost anyone can do it, thereby avoiding high MERs and advisor fees. On the other hand, we also have over 30 years of evidence to support Beating the TSX. There’s room for both.
Personally, I use Beating the TSX stocks for the majority of my Canadian equity exposure, but I’ve added in some other blue-chip dividend-paying stocks from other sectors that are not represented well on the BTSX list like consumer staples, industrials, and materials. These stocks all have a good history of dividend growth. One might also look south of the border to invest in other sectors. I’m aiming for the glorious trifecta of dividend yield, growth and capital gains.
Personally, I use index ETFs for my international exposure.
Like you Mark, owning XAW (iShares Core MSCI All Country World ex Canada Index ETF) gives me exposure to the rest of the world with a single purchase, all for 0.22% per year, which is a good deal in my books.
Emerging markets are more speculative but have underperformed for a long time and I think they’re going to shine eventually. As such I own XEM (iShares Emerging Markets ETF) and a little of another lesser-known but interesting ETF, EMQQ, that excludes the less-profitable, more risky state-run enterprises.
Ha, so many dividend investors (including myself) use XAW for extra diversification – it’s simple, but it works! Let’s talk about BTSX results, over long-investing periods. What has been the performance of BTSX vs. the TSX – does it really work in practice?
Last year, our BTSX portfolio returned 41.7% vs 27.8% for the benchmark TSX 60 index – that’s a 13.9% outperformance (total returns).
As of the end of 2021, the 30-year average rate of return using the Beating the TSX method was 13.13%, whereas the benchmark index rate of return was 10.46% over the same time period.
I’m not aware of a single mutual fund in Canada with a track record of such out-performance. In fact, BTSX has outperformed the benchmark over the last 3, 5, 10, 20 and 30 years.
Source: Dividend Strategy.
What this means in real terms is that $10,000 invested using the BTSX strategy 34 years ago would be worth $369,752 today. That same $10,000 invested in the benchmark index would be worth only $173,859 – a 113% difference.
Source: Dividend Strategy.
It’s remarkable to me that a simple rules-based method that anyone can use can yield results like this, but the data is the data. There are certainly years when BTSX underperforms – 2020 was one of them – but the long game has been extremely profitable and I suspect this will continue for this fundamental reason: Beating the TSX buys big dividend-paying and growing stocks when they’re on sale.
Love these charts and the long-term results!
Lastly Matt, what stocks are on the BTSX list for 2022? How can folks follow the performance of these stocks with you in 2022 via your site and newsletter?
To be scientific about our performance numbers, we create a new portfolio on January 1st every year. Here is the 2022 BTSX portfolio:
But readers who invest at other times of the year need more up to date data, so I also maintain a list of the entire TSX 60 index, listed by dividend yield, in addition to a real-time list of BTSX stocks on my website.
DividendStrategy.ca is the only place you can find this information whenever you need it.
Thanks for the opportunity to share “Beating the TSX” with your readers, Mark!
I know you discuss many of the stocks you own, and buy, but if your readers are interested in more information about BTSX, more focused-BTSX articles, and solutions to many other issues that self-directed investors face, I would encourage them to go to DividendStrategy.ca.
I look forward to sharing my content with readers.
Folks, there you have it.
BTSX is a long-term winning strategy and is likely to be great approach going forward for all the reasons Matt and I write about. I hope to have Matt back on the site in the future, to discuss how he manages his portfolio in early retirement and/or any big changes he sees in the BTSX approach as he monitors the methodology over time.
I second the subscription to Matt’s site – it is excellent.
Thanks for your readership.
Related BTSX Reading:
Here is my primer on the BTSX strategy – with thanks to some of Matt’s content of course.
Read on to learn about some stocks to own for ever growing income.
Buy the book Your TFSA Compounder from Henry Mah who shares a similar story about BTSX stocks to own.
There are the huge benefits in owning a 6-Pack Portfolio.
Like Matt, I believe these are some of the dividend stocks and ETFs built to last for your portfolio.
Can you Beat the Index? Yes, and Ross Grand proves it.
Learn more about the Dividend Tax Credit and leverage it to your advantage here.
I see you mentioned in the he beginning of the article this method doesn’t involve too much buying and selling because it’s only change 3-4 holding and most of keep it even it drop from the list. But what about rebalancing the stocks which continues to remain on the list. End of year chances are, their market value change and all hold are not in the same amount. In that case seems like lot of buying and selling to keep all holding in same amount in the beginning of year. Is it? Or I am missing something.
Thanks, a great point Dev. Yes, the 6-7 stocks that remain on the list might have different values over time. I think it makes sense to have targets to be honest. But the true idea of the BTSX is to sell all assets each year and buy the new top-10…something I don’t do. I tend to buy and hold all these and rebalance over time as needed.
Thank you Mark. Now I have only 3 holding BCE, ENB & BNS. Until my portfolio sufficient big enough with all 10 holding I will keep buyuing new onces. Unless the one I have drop out of list. Thanks you provide the link for rebalance strategy blog. I can use for my other Holding.
I’m a big fan of BTSX but again, I tend to buy and hold and then reinvest all dividends paid over time.
Happy to answer any other questions!
Thank you for all the information that you provide. Does the “Beat the TSX (BTSX)” strategy work for those close to retirement? These would be held in a non registered account as my registered accounts are maxed out.
I’m about to find out Shelley!! 🙂
I’m 2-3 years away from semi-retirement so I hope so, but I don’t really sell those BTSX stocks. Same with Matt from Dividend Strategy. We tend to buy and hold since the list doesn’t change too much year-over-year, maybe 3-4 at most of the stocks change.
Kidding aside, I know many retirees that follow this site own BTSX stocks for the income and growth they provide. Their holding time with some of these stocks is 20-30 years…
If your registered accounts (RRSP/RRIF) and TFSA are maxed out, Canadian dividend paying stocks can make sense in a taxable account.
Hope that helps!
It’s scary to buy any stocks now given the many issues facing the market. Issues like inflation, interest rate increases, geopolitical tensions, etc, etc. With the tech stocks sharply down, may be it’s time to buy the dip and invest in those innovative tech stocks that have a high probability of beating the TSX. Hate or love tech stocks, they are here to stay to power us further ahead into the futuristic world. The energy stocks are another worthwhile play, in my opinion. Good luck to you all.
Totally agree Ken, re: tech stocks and likely a good time to buy back in.
I’ll venture that the GST (Gouge and Screw Tax) will go back up. It started at 7% and was lowered, I believe by Harper, to 6% and then (now) 5%. Don’t know how many billions$ that would bring in but not an insignificant amount.
What I want to see is what the QC government does. When the GST went down 1% the QST went up 1% When the GST went down another 1% the QST went up another 1%. Now following the logic of this, is there anyone who would want to bet the the QST will go down by the same amount the GST gets raised? ROFLMAO. I thought not!
The GST screws everyone equally so there would more than most likely be less stress points to complain about – other than we are taxed too much.
P.S. I have six of the BTSX
Personally would take the “T” money and put it in to BCE for the simple reason that they are both telecommunications and BCE pays more. 1% more per year.
Yes, the easiest way to dig out of this debt stuff is to raise the GST but I don’t know if the government is that smart nor wants to take the political risk. We’ll see. I think that’s a good idea overall, personally I support it, for the reasons you cited – everyone is hit 🙂
I don’t have much money to buy 10 stocks. is these strategies also works for Top 5 rather than Top 10 dividend paying stocks? My bank don’t charge trade fee so paying trade commission is not an issue but I don’t see the value to buy 10-20 share of 10 company.
This strategy works well with even just two stocks. When starting to invest you buy one or two companies and build on that as you are able. I would start with BCE and BNS. You can’t go wrong with a Canadian bank and the largest Telco.
Perfect that sounds comforting.
Start slow. Buy a individual stock shares until you have enough quarterly dividend to Drip a share in that stock. Then move on to buying another stock, repeat. Over time you will own the best of the TSX60.
Steady and slow wins the race.
I echo that. I bought my first dividend paying stock in 2008. I started with one.
Thanks Bonnie and Mark for guiding me on my investment journey. This will help me to have patience and get confidence in my investment strategy.
Definitely a journey Dev! It applies to all of us.
Drop me a line if you have more questions!
Fair points to that. A good book on this subject is the 6-Pack Portfolio.
You could even start with one stock. More individual stock risk of course with one selection but you could allocate a very small % of your portfolio towards one stock (say 3-4% and leave 96-97% in exisitng assets) and go from there. Many DIY stock or ETF investors started that way. Just be mindful about owning too many stocks, too fast, or diworsification as you progress.
Great Interview, Mark and Matt.
For BTSX portfolio, should one start from Jan. 1 of each year, or you can start any time during the year, and hold for 12 months, then rebalance?
I believe, for the most part, and Matt can clarify, the idea is to rebalance/reconstitute the portfolio in January every year – makes for a good starting point. Hold for the following 12 months. Then repeat the process. You don’t really have to start in January I guess but the idea is to have a consistent holding and rebalancing period – since this process of which the BTSX performance has been tested and measured against.
Thanks for sharing! I think BTSX list can be a great option for those with Smith maneuver portfolio.
Excellent Interview Mark and thank you!
I love Matt’s site and like you said following the BTSX is simple enough even for a novice investor like myself and I happen to have 8 out of the 10 companies in the BTSX and like Matt said there’s no reason to drop those companies once the share price goes up because they remain a great and solid companies.
I’ve read Henry’s 4 books and I’ve learned a lot from them and made some changes in my portfolio and I’m extremly happy with the changes and here I know I said this many times but I can’t thank you guys enough Mark Henry Matt Bob lai and many others who tries to help other Canadians to make a better decisions when it comes to their financial future.
Awesome stuff Gus and love these comments. Own 9 of 10 myself in the 2022 BTSX edition. No plans to sell any. DRIPping as much as I can of all of them 🙂
“Do you believe in both dividends for ever growing income along with the hope for capital gains from ETFs?”
This question is interesting because:
1. It sounds like you would buy dividend paying stocks for income, and ETFs for growth.
2. I agree you might get market growth from ETFs, provided the market goes up, but I don’t believe you get as much income from ETFs.
3. If one selects a portfolio of quality DG stocks, you’ll get a growing income and market growth, probablly as much growth as the ETFs.
Thanks cannew. I was coming at this question from the perspective that broad-market ETFs focus on growth/price gains vs. income. I believe you are correct in that certain stocks, proven dividend growers, can offer both growth/price gains (because people want to own them) and income as well 🙂 Trust me, I own about 20 of these consistent long-term growers!
Hi to all. Matt mentioned that “Dividends can be extremely tax-efficient because of something called the Canadian Dividend Tax Credit. This is essentially a government incentive to invest in dividend-paying companies.” The Dividend Tax Credit is not an incentive to invest in dividend-paying companies. It was put in place in the tax legislation to create the “integration” of the tax system. A company that has a profit will pay tax on that profit. Dividends are paid with after-tax money from the companies. If dividends from Canadian corporations were to be taxed at the same taxation rate than ordinary income (salary, interest, RRSP, etc.) the shareholders that are individuals would pay too much tax on their dividend income. To compensate the shareholders, the Dividend Tax Credit was put in place. The idea behind the “integration” is quite simple, the total of taxes paid by the company on its profits and the shareholder on the dividend should not exceed the taxes paid by the shareholder if he (or she) had been taxed personally on the profit realized by the corporation. When the tax rates of the Canadian companies are increased, the amount (the rate) of the dividend tax credit will also increase to compensate the shareholders.
That’s a fair comment to point to that word Yvon…thanks for that, since it really helps avoid double taxation for the same income. I’ll let Matt answer but I suspect the incentive he was referring to was not the tax credit per se but the fact that dividends are taxed very favourably overall (under $50,000 or so across all provinces) assuming you earn no other income. That’s a pretty big incentive.
To your last point, do you believe Canadian tax rates for corporations are going up? re: shareholders will also recieve the DTC to compensate? I supsect this is where things are going longer-term = higher taxation.
Thanks for the comment, Yvon. You’re right, of course – the dividend tax credit is a means to ensure tax integration with capital gains. My understanding is that both capital gains and eligible dividends receive preferential tax treatment in order to incentivize investment in public companies – necessary to keep our economy growing. The fact that only half of capital gains are taxable is the incentive for non-dividend-paying companies, while the dividend tax credit is the primary incentive for dividend-paying companies. Even though there are small differences in taxation of eligible dividends vs. capital gains depending on income, on average they are taxed approximately equally. Sorry if this point was unclear and I hope this explanation helps.
A little bit of history. Before 1972, capital gains were not taxable in Canada. In the sixties, the Royal Commission on Taxation (Carter Commission) proposed to tax the capital gain realized on disposition of assets, with some exceptions like the principal residence. It was decided that only 50 % of a capital gain would be taxable, to take into account, among other things, the fact that a portion of the gain is attributable to inflation. That rule applies to all kind of properties (shares of private or public corporation, real estate, etc.). Over the years, different measures were adopted in regard of the taxation of capital gain, like the capital gain exemption for certain shares of private corporations. It would be too long to describe all these measures.
Mark, you have a good question. I have no idea what Department of Finance will do. They are in charge to propose new legislation and Canada Revenue Agency applies it. Your guess is as good as mine. That is something over which I have no control. I only control my investment strategy and the type of investments I can acquire. They may increase taxation of capital gains by increasing the portion that is taxable to 75 % like it was in the 90s.
Thanks Yvon. I suspect it could be political suicide to increase the taxation of capital gains from 50% to 75% or somewhere in between but then again, our country is becoming more debt-ridden by the day which is not helpful whatsoever. I don’t worry about it too much (as well) unless I consider where my ballot goes come election time.
I think for now, I will continue to own some CDN dividend payers in my taxable income for two key reasons myself:
1. The relative tax-efficient income those dividends provide and,
2. The income stream they reasonably deliver – I can depend on some dividends and dividend increases in the coming years to fund part of my semi-retirement plans.
How are you investing inside the taxable account? Dividends and/or for gains?
Thanks for your detailed comments.
Quite simple, CDN growing dividend payers and the capital gains will follow.
With ya there 🙂
Taxation is my area of expertise. The concept of integration is about preventing double taxation. Whether a corporation pays salary or dividends the aim is it should result in the same amount of total tax to get to the individual. In public companies the eligible dividends being paid have a tax adjustment to minimize double taxation. The individual that receives the public company dividend should not result in more tax being paid(corporate and personal) then if the funds had been earned in their hands directly ie salary.
Capital gains having a preferential rate is just a government decision on how to tax/encourage investment/attract capital.
An Integration example, assume top personal tax rate of 50% and corporate tax rate of 25%.
If a corporation earns $100 and pays a salary of $100, no corporate tax. It will result in personal tax…say $50 to net $50. Integration and the dividend tax credit amounts are designed to take that same scenario with the corporation tax to ultimately have the same net amount.
So corporation earns $100 pays $25 tax to net $75. Individual now receives $75 less the tax they will pay on the dividend, which in a perfect system would be $25 to net $50. So perfect integration has the individual receiving the same net amount regardless of being paid salary or dividends.
Integration doesn’t work perfectly in Canada. There is always a bias to one or the other. We have different gross up and tax credits for eligible dividends vs non eligible dividends which are trying to deal with the different corporate tax rates that will be paid to ultimately result in the same net amount when paid to the individual.
Thanks Brent. I wrote about the DTC here. Our tax system is a mess sadly (sorry, hope you didn’t design it!!) and unfortunately it’s full of flaws.
I consider the DTC this way:
“For dividend paying companies dividends come to us from after-tax profits. Investors who hold Canadian dividend paying stocks get to offset the taxes already paid by the company in non-registered accounts. CRA basically subsidizes dividend investors for the tax the corporation already paid on dividends.”
“The individual that receives the public company dividend should not result in more tax being paid(corporate and personal) then if the funds had been earned in their hands directly ie salary.”
That’s a great way of putting it.
Do you think capital gains will go to 75% from 50%?
I suspect something has to give with our government debt. At least if corporate tax rates go up, the DTC should go up as well.
Thanks for the thoughtful reply.