10 stocks to grow old with

Dividend investing delivers safe stocks that spin off cash and have historically beat the market.

Bill Turnbull is the living definition of the phrase “long-term investor.” The 89-year-old former bank manager has been saving money for more than 40 years — starting in the late 1960s, when his kids were young and his mortgage was new. Turnbull’s investment style has evolved over the years, but since the ’90s he has focused almost exclusively on blue-chip stocks that pay juicy dividends. He particularly likes Canadian banks, but each of the 20 to 30 stocks in his portfolio has some sort of regular cash payout. So far, that strategy that has served him well. When he started investing in stocks in the early ’90s, his portfolio was worth $100,000 — today, despite the market crash in late 2008, it’s worth more than $650,000.

If you’re interested in building a retirement portfolio like that, you may want to try Turnbull’s approach. Given the extreme volatility in the markets over the past few years, many like the idea of investing in solid, reputable companies that make enough cash every year to pay a good chunk of it out directly to shareholders. Even better, historical data show that over long periods of time, stocks that pay high dividends — especially those which regularly increase their dividends — soundly beat the market. If you invest in such stocks along with the right mix of bonds, you’ll get what many investment advisers say is the perfect retirement portfolio. Not only is it easy to set up and maintain, it’s crash resistant, dependable, and once you’re retired, it will provide a steady stream of income for years.

Just the right level of risk
Before you pick your stocks, however, you need to decide how much risk to take on. Taking on more risk usually means putting a higher percentage of your portfolio in stocks. You’ll get a better rate of return over the long run, but a sudden crash can wipe you out. The solution is to add bonds for safety, and increase the percentage that you have in bonds as you grow older. Nancy Woods, an investment adviser at Toronto’s RBC Dominion Securities, says a simple way to calculate exactly how much to put in stocks versus bonds is the “100 less your age rule.” All you do is subtract your age from 100, and put that percentage of your holdings into stocks. Thus a 40-year-old would have about 60% of her portfolio in stocks, while a 60-year-old would scale back to 40%.

The next decision you’ll have to make is where in the world to invest. Within the bond portion of your portfolio, the answer is easy: most investors should stick to a simple Canadian bond fund with low fees. The PH&N Bond Fund, which has a low management-expense ratio of 0.58%, is a good choice. Canadian bond yields are low right now, and you can get better yields with emerging-market debt, but Luc de la Durantaye, vice-president of CIBC’s asset allocation and quantitative team, suggests sticking to home-grown debt, as this part of your portfolio should be as safe as possible.

In the equity portion of your portfolio, a different approach is in order. According to Norm Rothery, founder of and The Rothery Report, you should only put about a third of your equities money into Canadian stocks, with another third in U.S. stocks and the remaining third in other international stocks. Investing in companies around the world will make your portfolio less susceptible to local economic troubles in any one country. As well, international diversification will give you access to sectors that aren’t well-represented at home (such as health care), and prevent you from inadvertently overweighting sectors such as natural resources, which make up an unusually large part of the Canadian economy.

Stocks that outperform
Now you’re ready to start picking the individual stocks for your portfolio. If you were to buy a random selection of stocks gleaned from the newspaper, eventually you would find that you’re getting close to market returns. That’s because a diversified group of 20 or 30 stocks represents the larger market in much the same way that a random collection of people represents the larger population in a survey. If you want to do better, you may want to try sticking to particular group of stocks: those that pay high dividends.

Rothery says that between 1977 and 2007 the highest-yielding Canadian companies saw 15.9% average returns each year — while a comparative non-yielding group of stocks only climbed 5.1% a year. Dividend-paying stocks also do well in a downturn. According to What Works On Wall Street by James O’Shaughnessy, during the worst market slumps between 1951 and 2003, large stocks fell 46.6%. Meanwhile the top 50 large-cap companies by yield dropped by only 29%.

To help get your portfolio started, in “Retirement best bets” above we screened for companies that have not only been paying regular dividends, but increasing them every year. We started by looking at companies on the TSX 60, then screened for businesses that have increased their dividend payout over the past year and past five years. Finally, we divided the resulting companies into the 10 TSX industry sectors and picked the stocks with the top yield in each group. (Since the Health Care and Information Technology sectors were not represented by any stocks in our screen, we added the next two stocks by yield, regardless of sector.)

The resulting picks are suitable for the Canadian portion of your equity portfolio. They are diversified by sector, and the fact that they are able to increase the amount of cash they spin off every year indicates a mature and healthy balance sheet.

In fact, they are exactly the sorts of stocks that Turnbull likes. Piling into startups and speculating on junior mining companies may be a lot more fun — but if you want wealth that lasts, he says, dividend investing is the way to go.

Retirement best bets

These TSX 60 companies have increased their dividends over the past year and the past five years. They’re suitable for the Canadian equities portion of your retirement portfolio.

Saputo (TSX: SAP)
This Montreal-based company has been making dairy products since the 1950s. It now has a market cap of just over $6 billion. In 2008, it bought George Weston Ltd.’s Neilson Dairy division, and it bought F&A Dairy of California in 2009. Saputo’s current dividend yield is 1.93%, an increase of 102% over five years.

Canadian National Railway (TSX: CNE)
CN Rail took a hit during the recession, but volume is expected to increase 10% by year-end. In April, the company announced revenues were up $87 million over the year before, and analysts are bullish. National Bank’s David Newman recently wrote that “CN has strong future growth potential.” Its dividend yield is now 1.70%, a five-year jump of 159%.

Telus (TSX: T)
The Canadian wireless market has developed slower than in many other nations, so there’s still growth opportunity for Telus. While increased competition could cut into its market share, analysts think the Vancouver company’s restructuring efforts and improved free cash flow will help the business going forward. Telus is currently yielding 5.56%, up 192% in five years.

Quebec-based BCE faces some of the same competition issues as Telus in wireless, but the company is more diversified with revenue coming from land lines, Internet services and satellite TV. Vince Valenti, an analyst with TD, writes that he likes current management, which has cut costs and made smart investments in wireless technology. BCE currently yields 4.95%, an increase of 20% in five years.

Shaw Communications (TSX: SJR.B)
Calgary-based Shaw Communications sells cable, Internet and phone service. It’s currently in the process of buying Canwest’s TV assets, which would make it a major player in the media business. Some analysts are worried that Shaw is shifting away from its core business, but the company’s dividend yield is high at 4.44%, and payouts are up by 730% over five years.

TransCanada (TSX: TRP)
Calgary’s TransCanada develops oil pipelines and produces energy. In June, it began delivering crude to the American Midwest, and it hopes to reach Texas by 2011. Some analysts are concerned about the lack of activity on the Alaska pipeline, but a resolution to the issue appears to be in sight. Dividend yield is strong at 4.3%, and the company has increased its dividend by 31% over five years.

Power Corp. of Canada (TSX: POW)
Montreal-based Power Corp. has interests in Power Financial Corp., Great-West Life, IGM Financial and newspapers in Quebec and Ontario. In May, Power Corp. announced its net earnings climbed by $73 million over the year before, but it still hasn’t recovered to where it was before the recession. POW has a yield of 4.30%, with a five-year dividend growth of 109%.

Kinross Gold (TSX: K)
Based in Toronto, Kinross Gold operates eight precious metals mines around the globe. Because commodities are cyclical, this is probably the riskiest stock found by our screen. If the price of gold falls, so will the stock valuation. Still, analysts like the company’s short-term prospects. Its dividend yield isn’t as high as our other picks, at 0.55%, but that’s relatively high for its sector.

TransAlta (TSX: TA)
Calgary-based TransAlta generates and sells electricity. It has a diverse portfolio, with assets in coal, natural gas, hydro and other areas. Recent acquisitions should make the business stronger, but CEO Steve Snyder has tempered expectations for 2011. The current dividend yield is 5.4%, which is up by just 16% over the past five years.

Bank of Nova Scotia (TSX: BNS)
Scotiabank is continuing to expand into developing markets. It recently bought a wholesale banking business in Colombia, an equity interest in a Thai bank, and it has operations in 50 other countries. Analysts have expressed concern over holdings in less stable nations, but many foreign investments are already paying off. Scotia’s dividend is 3.83%, with payouts up by 78% over five years.