Weekend Reading – Stocks with Moats

Weekend Reading – Stocks with Moats

Hey Everyone!

Welcome to an updated Weekend Reading edition, about some stocks with moats.

Before that theme and some updates in today’s edition, few recent reads and reminders:

I answered a reader question about owning Canadian-listed ETFs vs. U.S.-listed ETFs here.

My answer at the end is very simple!

Should you own Canadian-listed ETFs or U.S.-listed ETFs?

Last weekend, I shared this post below in case you missed it.

Although I aspire to “live off dividends” to some degree, my answer to my own question might surprise you…

Weekend Reading – Should you live off dividends?

Weekend Reading – Stocks with Moats

Maybe just like some medieval castle, a moat serves to protect those inside this massive fortress and maintain some riches from outsiders and threats at the same time. 

Weekend Reading - Stocks with Moats

Image source: Pexels, Francesco Ungaro.

I’m not sure we can put an origin around this term but most would say the modern-investing term economic moat was popularized by the one and only Mr. Warren Buffett.

As part of Buffett’s investing approach, he liked (and still likes!) finding and owning undervalued stocks based on certain fundamentals, including those with a competitive advantage. 

Although Warren doesn’t really practice diversification like he preaches (see his previous SEC ownership below with 50%+ still in Apple stock!), owning moaty stocks can make great investing sense for the rest of us… 

Weekend Reading – Does diversification really matter?

How might you find a company with an economic moat?

I believe a few things come to mind in your search and what I’ve looked for over the years:

1. Production advantages – a company achieves production advantages when it is able to provide a product or a service at a lower cost than that of its competitors.

2. Consumer advantages – said company achieves consumer advantages when it is able to provide a greater benefit to consumers than its competitors do. Maybe there is a “network effect”, in that more customers use a product or service over time. There is however a “cap” of users for a specific product or service eventually consider. See Netflix! 🙂

3. Brand value – here, a company is able to generate more revenue or charge a premium price for products or services because of brand recognition, ideally due to well-known and quality products or services.

Companies can therefore build their economic moats by achieving economies of production scale, building a network effect, and amplifying a brand, among other work. In doing so, companies get back high consumer loyalty, high market power, and in many cases assure critical legal protections/patents along the way that make it very difficult for other companies to compete with them.

Should you own companies with an economic moat?

I believe so. 

While any company let alone any sector could be ripe for disruption, at some point, I believe owning companies that have a competitive advantage puts a few odds in your investing favour – in that if a company’s success is hard to replicate let alone beat, it could be a more sustainable and durable company if/when disruption does hit.

Morningstar Research Inc. has in the past, described an economic moat as how likely a company is to keep competitors at bay for an extended period. Morningstar analysts tend to give ratings for a company, with an economic moat, in various industries. 

Morningstar.ca had this post in early 2023 when it comes to owning moaty Canadian banks.

I believe however you need to look past Canadian banks for moats. 

I happen to own these moaty Canadian stocks in our portfolio:

  • Canadian National Railway (CNR)
  • Canadian Pacific Railway (CP)
  • Waste Connections (WCN)

I disclose as much as I can / am comfortable with on this site. These are not recent additions.

I’ve talked about CNR and WCN in particular in the past.

CNR here.

Then and Now – Canadian National Railway

WCN here.

Then and Now – Waste Connections

Maybe you don’t realize it, but Canada’s railway industry is a prime example of a wide moat at play for generations. Essentially, both CNR and CP have a stranglehold on the transportation of goods around the country and beyond. 

Waste Connections is the one of the largest players in the waste management industry. This company has also adopted a unique strategy of serving rural clients with exclusive waste management arrangements to fend off competition. Moaty to me!

Check out the returns in owning some of these lower-yielding but higher growth stocks in your portfolio compared to low-cost Canadian-listed ETF favourite XIU:

Weekend Reading - Stocks with Moats CNR, CP, WCN, XIU

Source: Portfolio Visualizer. 

Incredible stuff.

Of course, past performance is never a perfect beacon for future investing returns.

However, I personally believe that owning a nice mix of dividend growth stocks, including lower-yielding and higher growth stocks in your portfolio (along with any low-cost ETFs of your choosing) will put the wealth-building odds of financial success in your favour. 

….

That said, should you not want any individual stock risk, then no problem, consider owning low-cost ETF XIU for Canadian content – one of my favourites that includes some moaty stocks by design:

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products and services that have wide, sustainable moats around them are the ones that deliver rewards to investors.” – Warren Buffett

Because a future siege to the moaty castle or fortress could come at any time, a moat must be sustainable over the long haul.

Keep in mind the water could dry up. The enemies could start a war. Patents expire. Consumer needs and expectations shift. 

Yet for the most part, owning a basket of moaty stocks could put the odds of financial gains and long-term durability in your favour.

Further Reading:

I keep this post updated too – how I built and maintain my portfolio here.

Here is the Beat the TSX approach and the stocks that tend to do it in most years.  

More Weekend Reading…

On the Canadian bank moaty theme, here are our largest banks with thanks to Stocktrades.ca.

Here is a great example about avoiding market noise and any associated expert predictions – just stick with your own risk-based personal finance investing plan and just keep buying.

I wonder if he’ll ever get it correct? HAHA.

From Rich Dad, Poor Dad:

Rich Dad, Poor Dad - Feb. 2024

Morningstar shared some tips to make the most of your RRSP this year. I liked the list. 

Over at Cashflows & Portfolios, we updated this pillar post about Everything You Need to Know about the RRSP and Contribution Limit. I thank readers for their questions – making this post better and better over time!

Of Dollars and Data was hardly a fan of this new book by salesman Tony Robbins:

The Holy Sale of Investing

Scary stat related to housing affordability. Eek. With thanks to @HanifBayat – a must follow IMO.

A big thanks to Rob Carrick from The Globe and Mail for including my Mortgage Free!!! Now What??? post in his personal finance column recently. I liked his simple advice for me/us, and we’re following it in 2024. 

I’ll be back next week to discuss a number of top-10 retirement mistakes including what I’m trying to avoid myself from that list and what I observe/have learned from others who have been there, done that too. That should be a good one. 🙂

Have a great weekend!

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.

30 Responses to "Weekend Reading – Stocks with Moats"

  1. Whenever I buy any of these Canadian dividend growth companies I’m usually thinking “value”, in my case whatever is lagging in the portfolio, whether it be a sector or an individual stock within that sector.

    As I’ve found just last month, even the faster growing companies with very low dividend yields can sometimes halt their expected annual dividend increases. Richelieu (RCH) which I’ve owned shares in since 2011.

    Reply
    1. Indeed. I like owning a few lower-yielding, higher growth stocks. They seem a bit more dependable per se. I continue to share a few examples of what we own: WCN, CNR, CP, etc. but I also own the banks, the telcos, the utilities, the Brookfields, and more. Some of the boring “top stocks” of the ETF XIU has been my thing for years…

      In doing so, I have a number of dividend increases this month to report in a few weeks.

      Hope all is well with your portfolio, I’m sure it is!
      Mark

      Reply
  2. Hi Mark: This is a little off topic but had a weird email which might be of interest to you. On Sunday I received an email entitled Transform My Own Advisor With Our Contributions. This was sent by a Mattie Estratta from New Publisher and she liked the site and the stories and wondered how much I would charge to host their stories on my site. As you can see, weird, since its not my site. Just wondered if you or anyone else had got an email like this.

    Reply
  3. Hi Mark: I have some moaty stocks also. There are different strokes for different blokes so unlike you I want to be paid for my investments so no 2% stocks for me. Dividends On is mainly right but I take umbrage with one of his examples. Having a good memory can sometimes be a curse. Brookfield would not be were it is today without the seed money from the Bronfman’s. At the time it was called Brascan and had many companies one being Edper Enterprises. Later on Brascan decided to simplify the structure and so sold off companies and changed its name to Brookfield Asset Management. I had Great Lakes Power and it was bought out by Brascan and I took the shares because Brascan paid a higher dividend. At the time Trilon Financial was also taken private so the company didn’t collapse. At the time it was a 14Bil. company and now has over 900 Bil. in assets so not a complete waste. GE was another company that went downhill but if bought and sold at the right time could have been a fortune. A case in point. I was talking to the plant photographer in ’85 and he said CGE was a great company but you couldn’t buy the company because it was private. I politely disagreed but he was sure he was right so I went home and cut the stock page out of the paper and brought it in to show him. This got me thinking but I didn’t act as it was not my type of company as it was $62 5/8 but if I had then I could have bought 100 shares for $6262.50 and in ’87 it was $125.00 and the company split the shares 5-1 so now I would have 500 shares. The company was taken private by GE so with the exchange rate the money from my 500 shares would have allowed me to buy 300 shares of GE. In 1992 the shares split 2-1 that makes 600 shares, in 1994 the shares split 2-1 which now makes 1200 shares, in 1997 the shares split 2-1 which makes 2400 shares and in 2001 the shares split 3-1 for 7200 shares and an after split price of $50.00. My original price of $6262.50 would now be worth $360000.00. Now would be a great time to sell as GE went in the toilet after that but that would have been a nice profit. To bad I didn’t act on it. All these experiences I put down to learning experiences. I didn’t lose in this case as I just didn’t make anything because I didn’t buy.

    Reply
    1. Great details to share. I know a few investors that have bought and held a few individual stocks since the 1980s and have made a small fortune in doing so. Time is simply on their side. Buying a particular stock is one thing, the holding period seems essential too.

      Thanks Ronald!
      Mark

      Reply
  4. Thanks Mark for your great posts as usual. In today’s market, AI (artificial intelligence) stocks are moaty as they are going to revolutionize the world, if not already. Take NVDA, for instance, Janssen Huang is the king of chips and the stock has so many advantages over their competitors. NVDA will keep surging to all time highs with no sign of stopping. I think (in my humble opinion) high quality AI stocks, besides NVDA, will be powering the future growth of the tech industry to unprecedented height and make investors very wealthy. What are your thoughts??

    Thank you, Mark

    Reply
    1. I see little signs that tech growth won’t continue and I shifted into QQQ a few years back for that reason.
      We’ll see if I an correct long-term (?) since I use that ETF for my tech growth ticker. Lots of NVDA in QQQ. 🙂

      Have a great weekend, Ken!

      Reply
  5. I love the no nonsense approach to investing shown on this site. We have 15 individual Canadian stocks. Any advice on when to journal over from Canadian to American stock equivalent? For example we have WCN.to to journal over eventually. I’m thinking wait until the value of the canadian dollar increases…

    Reply
    1. Thanks very much. Nice to hear from you on this, Christopher.

      Really depends on the journalling stuff, good advantages as you know: keep the same stock/ETF units; avoid currency exchange fees; avoid commissions, etc. It’s really about getting your $$ in the currency you want, given some CDN stocks have so much business in the U.S. and abroad and therefore they pay their dividends in USD $.

      All my best 🙂
      Mark

      Reply
  6. Thank you for the post Mark! yes those moaty companies are amazing, I hold those 7 companies in Dale’s portfolio and more , as for growth companies CNR represent the biggest chunk in my portfolio and it did well I also love their dividend increases bought ATD in my wife’s portfolio few months back and it’s up 16% already what an amazing company , the one I’m debating is CP I also love the company it’s just the irregular dividend increases that I don’t like about it but perhaps once the merger is done they’ll be able to go back on track and resume that as for now I’m looking to increase my position in BIP and BEP because it looks like the world is solid foccus on green energy and our government latest budget indicate that we well.

    Reply
    1. Great stuff, Gus. I suspect many dividend investors in Canada own those 7 companies in Dale’s portfolio, but yes, don’t forget some railroads (CNR, CP), WCN and ATD and low-yielding but growth oriented companies as key options too!

      I also like, haved liked and owned BIPC and BEPC for some time. It is my hope both with “take off” in the coming decade. We’ll see!

      Mark

      Reply
  7. As of today, we own shares in 31 Canadian companies across seven sectors.

    Nine of these companies have been sidelined in the portfolio due to extremely slow or no dividend growth over the last few years. In other words, I won’t be buying new shares unless dividend growth starts to pick up, or else they may be ripe for an opportune sale at some time in the future.

    Reply
  8. I dunno. Moat type businesses remind me of fail safe and as I’ve learned the hard way over the last forty years of investing, “there ain’t no such thing”.

    I thought Dome Petroleum in the 80’s was on to a great thing. Oil exploration in the Beaufort Sea. How could it all go wrong?

    Two Bronfman brothers, part of Edper Investments and all it’s associated branches in one huge conglomerate. I don’t think investors got much out of that one. That started collapsing in the late 80’s through to the mid-90’s. Royal Bank obtained Royal Trustco. Original Royal Trustco got a bunch of worthless assets. You may find a few remnants of the conglomerate in Brookfield but I don’t want to complicate things.

    Another was the Reichmann family who invested in major real estate projects. Everything looked fine until they took a step too far with Canary Wharf. Successful later, but too late for the original stock investors.

    How can you go wrong with a funeral chain? Well you could if you owned shares in Loewen Group. Brought down in a lawsuit judgement down in Mississippi.

    Waste Connections makes me think of Laidlaw International. Another one that expanded too fast and ended up in bankruptcy by the early 2000’s.

    Seagram Company Ltd. I still wince at that one. One of the largest distilleries in the world. Talk about terrible management decisions that brought the whole company down and investors with it.

    Then there was the at one time humongous company on the TSE, Nortel. I couldn’t believe it. Watched our own shares go down to worthless. Been better off buying cases and cases of beer instead, like the old joke at the time. Enough said on that one.

    ————————————-

    Now I just diversify as much as I can in Canadian companies that I find interesting, in various sectors and hope they continue giving giving back to investors like they have in the past. Of course it doesn’t always work out that way with some of them moving forward into that misty future, but I never know which ones until after the fact.

    Reply
    1. I always think every 9 of 10 Canadians have lost money on Nortel, including my husband. LOL.

      My husband never wants to touch equity market after that. I have made lots of mistakes of my own. But hey, if you lose money and learn from it, that’s tuition fee you paid. If you lose money and didn’t learn anything from it, then the money lost forever.

      Personally I try not to have any one stock to exceeds 5% of my portfolio. With AQN, I lost 2.5% of my portfolio, well, that’s still affordable. Looking back though, among EMA, FTS and AQN, obviously AQN is the more risky one. As a DGI investor, this is not the first time I made mistakes with chasing yield. Hopefully I have learned my lesson and will not make the same mistake again in the future.

      Regarding to wide moat companies, I still don’t own CP and WCN, only CNR. Maybe now is a good time as any time to begin to buy some.

      Reply
      1. I think that’s always going to be the challenge with individual stocks = individual stock risk.

        If you own the index, they you decide to own all the studs and duds.

        I’ve owned CNR, CP and WCN for many years now and will only add more over time. That’s the plan anyhow!

        AQN will come back believe. It will take time.
        Mark

        Reply
    2. I see where you are coming from: many things can seem moaty until they are not but I stand by my thoughts as well that such companies that do have a competitive advantage tend to reward investors more than not. Nortel was simply fraud and bad management at the same time but that can and does happen!

      How many companies do you own now?
      Mark

      Reply
    3. You forgot to mention General Electric, Bre-X, Moderna and Enron. I got burned on all of these. People tell you when they do well, but never share their bad stock decisions! Can be “moaty” but never can be sure!

      Reply
      1. Fair, Sal. But the other point is, this is why any investor, including an indexer, needs to have a plan.
        Plans come before products/investments.
        Even if you just own 2 ETFs, you need to decide how much of each to invest in, when, etc.

        Consider a 5% rule or 10% rule for any individual stock. This way, if that stock goes to zero then you have 95% or 90% of your portfolio in non-speculative stuff or other assets.

        Just a thought but I appreciate your point.
        Mark

        Reply
        1. I don’t want to pile on with the moaty stocks turning bad. I too was burned by Nortel and also Laidlaw which got sunk by it’s deal with Safety-Kleen (I didn’t see that coming). After years of watching good companies turn bad in my portfolio I sold everything and switched to index investing. Indexing only provides “average” returns, but with my record of holding on to losers hoping for the best (Nortel, GM, Laidlaw, Gandalf, Seprotech and others all going to 0) “average” returns are much better than my past performance. One great benefit I have realized with ETF index investing is the self-cleaning feature (if a stock drops out of the index it is replaced by a new one automatically without a need of a plan for when or what to buy or sell). I don’t question that others can out preform the index picking the best dividends stocks is a winning strategy. However, I have yet to see a system or plan that works as well and doesn’t require more time and effort than index investing.

          Reply
          1. In my view, average with certainty, is better than a maybe first, maybe last.

            I recall reading that 85% of active fund managers unperformed the index. So, if your achieving “average”, then you’re doing better than the vast majority of investors. Keep on doing average; you’re ahead of the bulk of the pack. Perhaps have a little gamble on the side, just for fun!

            Reply
            1. Indeed. The challenge with those studies is they preach the active money manager rhetoric. Active money management almost by design has to fail the index because of fees and more importantly, active money managers are paid to be active – buy and sell. DIY investors have an advantage over active money managers in that they can determine their own holding periods – which can be measured by some in decades. That’s where DIY investors have a MAJOR advantage IMO over professionals – professionals are generally pay-for-performance otherwise nobody would hire them. 🙂

              I agree indexing is great but good financial behaviour and investor discipline trumps everything.
              Mark

              Reply
          2. Well said, Tech.

            “One great benefit I have realized with ETF index investing is the self-cleaning feature (if a stock drops out of the index it is replaced by a new one automatically without a need of a plan for when or what to buy or sell).”

            The upside of indexing is that, for sure. The downside of indexing is you will never realize any alpha – but for many indexing fans – they don’t care. They are banking on long-term growth and history says it should happen over time.

            I appreciate your comment,
            Mark

            Reply
      1. Hi Bernie,

        I far as I remember they were all dividend growers. I wasn’t interested in much else when investing in individual companies, even then, although I’m sure there were a number we didn’t own shares in, just in our watch list. We had very limited financial resources in these early days.

        Reply
    4. Thank you, DividendsOn. I occasionally have doubts about the path I’ve chosen of just owning global index funds (save for the few stocks I hold from my early investing days). Your examples are an excellent reminder of how it can all go wrong. I also appreciate Mark’s thoughts on how those wide moats can evaporate.

      In the UK, one company’s share price crashed within days of the CEO telling a joke! It took just 10 seconds to make the joke which destroyed his jewelry store empire (Ratners Group). It wasn’t a wide-moat company, but it’s an example of how an apparently good stock pick can turn to mush in days.

      The individual stocks route would, for sure, give me many sleepless nights.

      Reply
      1. Yes, moaty stocks remain moaty until they are not (!) for sure but historically big company failures are usually due to fraud or incompetent CEOs and management teams.

        I don’t mind owning the stocks I do at this point. I mean, I just got a 9% raise from one of them! :))

        There are of course risks with any individual stock selections, I don’t deny that, but some of the greatest investors in the world are not indexers. Something to think about. 🙂
        Mark

        Reply

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