Dogs of the TSX: A Simple Beat the TSX Strategy

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Dividend Earner

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3 min read Affiliate Disclosure

Every dividend investor looks for a money-making strategy that is simple to follow and execute. The dogs of the TSX is one such dividend investing strategy that is simple and has also beaten the TSX on many occasions as validated through backtesting.

For some background, the Dogs of the TSX approach comes from the Dogs of the Dow on the US front and the intention for this investing strategy is to invest in safe dividend stocks and beat the TSX performance – usually the TSX60 is used as the index.

What is the Dogs of the TSX strategy?

The investing strategy is pretty simple. It consists of selecting the top 10 yielding stocks from the TSX 60 and updating your portfolio every year with the new top 10 yielding stocks.

This strategy is also known as the BTSX strategy or the Beat the TSX strategy depending on what you read.

The concept is that out of favor blue-chip stocks will have a higher yield, thus pushing them to the top of the list. When dividends are growing and the stock price goes down, the yield goes up. If some high quality blue-chip stocks are out of favor more than others, than the yield shoots up as it did with Enbridge.

Selecting the Dogs of the TSX Stocks

Here are the steps to finding the top 10 high yielding blue-chip stocks.

  1. Sort the TSX60 stocks by dividend yield (forward dividend yield).
  2. Buy the top 10 stocks with equal dollar amounts.
  3. If a holding cuts the dividend, sell and replace with the next one.
  4. Hold your positions for one year.
  5. Repeat the process. If there are any differences, you swap out positions.

2022 Beat the TSX Stocks

Here are the 10 stocks matching the strategy criteria. You get a 5.28% yield on average.

2021 Beat the TSX Stocks

For 2021, these were the picks.

5 Risks with The Dogs of the TSX

While the strategy is so simple and is technically really easy to follow, it implies assigning 10% of your portfolio to each stocks.

BTSX Risk #1

Rule 4 of my 31 investing rules is about defining the number of holdings you want to hold. As it happens, a survey done with readers shows that less than 15% of investors hold 10 stocks or less.

As you can see, the majority of investors hold more than 20 stocks. There isn’t much difference between a retirees and someone accumulating wealth either.

Rules Number of Stocks

BTSX Risk #2

It’s not appropriate for all accounts. Selling and buying a full portfolio every year is not tax efficient.

You should avoid this strategy inside your non-registered account to avoid going through capital gains.

BTSX Risk #3

A research by MoneySense also shows there is a difference in performance when using the forward yield vs the trailing twelve months yield. The choice of yield depends on your risk appetite for having stocks in the list that have been beaten down.

BTSX Risk #4

You lose complete control over your sector exposure. You can end up with more than 40% in one sector or in the same industry for that matter.

BTSX Risk #5

Timing has an impact on the returns. While it has outperform the TSX 60 over 30 years, back testing showed that starting on a different month could have a negative impact and underperfom the TSX 60.

Modified BTSX Strategy

Following the Dogs of the TSX strategy like a robo-advisor is tough to do. I don’t know anyone that do it and most that follow the strategy implement a modified approach.

A strength of the approach is to find high yield blue-chip dividend stocks. It’s perfect for income investors.

What investors often do is not sell to avoid the capital gains and add to existing holdings.

Another adjustment investors do is increase the qualification of the dividend with a minimum number of consecutive dividend increases and a minimum annual dividend growth.

It’s no longer the same strategy and the more you keep going, the closer you arrive at the Dividend Snapshot Screeners. All you need to do with the screener is filter for TSX 60 stocks.

Dividend Earner’s Improved Dogs the TSX Stocks

I expended on the criteria. To avoid too much exposure to the same industry, I limit to 2 stocks within the same industry. I also want 5 years of consecutive dividend increases.

Here are Dividend Earner’s picks.

What Benchmark Should You Use?

The default benchmark used by most is the TSX60 simply because stocks are selected from the TSX 60 but is it the proper benchmark?

If I am an analyst, I want to compare apple to apple and since the selection is limited to the TSX 60 than I want a fair comparison.

However, if I am an investor, I want to compare with my alternate investing options. One of them is with the VFV ETF (Vanguard S&P 500 Index) which already easily outperform the Canadian TSX 60 from a total return perspective.

With that said, if you want income, the Beat the TSX approach can find great income stocks and provide a decent return. I admit that it’s a good approach for a non-registered account when using the modified version.

Beat the TSX vs ETFs

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.