Back in the early part of this decade, an investment strategy called Dogs of The Dow was popular. Part of the popularity was due to its beating the overall Dow index handily and the other part of the popularity was the simplicity of the whole idea- an investor just invested in the 10 highest yielding stocks in the 30 that make up the Dow Jones Industrial Average.
I wrote about the dogs of the dow back this summer, concluding that picking the 10 highest yielding stocks in the S&P 500 would be the more prudent play, considering there’s 500 to choose from instead of 30. In fact, someone has been doing that on Marketocracy for the past 5 years and is outperforming the market.
The problem with that strategy for Canadian investors is the currency risk involved when we invest in American securities. When our dollar appreciates against it’s American counterpart investment returns are hurt. Long term investors may choose to ignore currency swings entirely, knowing they’ll even out long term. Other investors may choose to buy more American stocks when the Canadian dollar is high (and the American Greenback is subsequently low, implying a good entry point).
Other investors may choose to ignore the U.S. completely and invest totally within Canada. While this may not be prudent from a global diversification standpoint, it does make the currency issue go away.
For these investors, an interesting strategy may be to purchase the dogs of the TSX Composite index. The investor is picking up stocks with very attractive yields and doesn’t have to worry about currency fluctuations.
When I ran a screen for the TSX composite, it turns out that all of the highest 25 yielding corporations are either income trusts or former trusts. This limits diversification drastically, as well as limiting us to only companies that are mature and slow growing- at least in theory anyway.
To make this exercise a little more realistic, let’s limit our search to the TSX 60. Yes, there will be income trusts and former trusts in the list, however we’re assured they’re the biggest of the sector, giving us at least a perception of safety.
Which companies would be included in this year’s dogs? Consider the following:
Company Name Ticker Price Yield
Cdn. Oil Sands COS.UN 26.60 7.50%
Transalta Corp TA 21.21 5.50%
BCE Inc. BCE 35.30 5.20%
Bank of Montreal BMO 57.66 4.90%
Arc Energy Trust AET.UN 25.67 4.70%
IGM Financial IGM 43.38 4.70%
Sun Life Financial SLF 30.34 4.70%
Great West Life GWO 26.57 4.60%
Power Financial PWF 30.66 4.60%
Telus T 45.50 4.60%
Average Yield 5.10%
Take a look at that table. What does it tell you, besides that I can’t draw a decent table on WordPress?
First of all, there’s a lack of diversification. The 10 stocks are in just 3 sectors- energy, telecoms and financials. That’s not really what we’re looking for.
Secondly, I’m not very impressed with the names. I bet if an investor would have done this exercise 5 years ago they would have come up with similar results. This either means that the stocks haven’t performed that well or that there’s a lack of selection, both true in this case.
The bottom line is I’m not terribly impressed with the dogs of anything investment strategy. If I was forced to pick a favorite I would pick the S&P 500 as the index to pick the dogs from, after all it does offer the biggest selection. What investors should really do is some research into some of the higher yielding stocks and try to figure out which ones look compelling long term, no matter what their investment strategy.