“Don’t try to catch a falling knife” is a common saying on Bay Street. That is, if you’re always looking to buy stocks on the cheap, you may end up reaching for the first-aid kit. But if you limit your choices to long-running large-capitalization stocks, the odds of coming away unscathed improve. With the Dogs of the TSX strategy, you’re trying to catch Canadian blue chips down on their luck, in the hope they have the wherewithal to recover.
This screen simply identifies the 10 stocks on the S&P/TSX 60 index with the highest dividend yield. It’s modelled after the popular Dogs of the Dow strategy, which restricts its sample to the Dow Jones Industrial Average. Since blue-chip firms typically don’t cut their dividends, the high yields might just suggest that these companies are near the bottom of their business cycles and, as a result, will see returns revert to the mean. Plus you get to enjoy those juicy payouts while you wait.
Historically, this strategy has beaten the broad market’s performance. Most of the time, these knives are only teetering at the edge of the counter. In a down market like we saw over the past 12 months, however, they were speeding toward the floor. Four of last year’s dogs lost 30% or more of their value. Potash Corp. dropped 44%. The three other hardest-hit stocks hailed from the energy sector. While we warned about the risks in this approach last year, particularly around energy, to be true to the strategy, we don’t indiscriminately knock out members of the group.
There were bright spots, though. The top two performers were in the telecom space. The third-best was CIBC, which was an exception among banks after posting a positive total return of 6.5%. This year it’s back, and it has company: National Bank and Scotiabank have joined the dog pack. While last year we expressed unease about oil prices, today we urge similar caution around financials. Loan loss provisions have been a pain point for banks over the past year. National, for one, recently accounted a fourfold increase in its loan loss provisions.
And don’t look now, but Potash is back too. It’s anyone’s guess whether it’s at or near its bottom, but to be safe, handle it with steel-mesh gloves.
|Company||Ticker||Dividend Yield (%)||Price-to-Earnings||Price-to-Book||Price-to-Sales|
|Bank of Nova Scotia||BNS||4.6||10.7||1.5||2.4|
|Canadian Imperial Bank of Commerce||CM||4.8||10.4||1.9||2.2|
|Inter Pipeline Inc.||IPL||6.1||19.9||3||5.1|
|National Bank Canada||NA||5.2||8.6||1.5||1.8|
|Pembina Pipeline Corp.||PPL||5.3||36.8||2.1||2.9|
|Potash Corp. of Saskatchewan||POT||6.3||12.6||1.6||2.3|
|Shaw Communications Inc.||SJR.B||5||14.5||2.1||2.1|
More from the 2016 Investor 500 Market Guide:
How to position your portfolio for the rest of 2016
Risk-tolerant investors will find opportunities over the next 12 months. The rest of us should keep our heads down