Hello everyone,
I'm happy to see this thread on 'Beating the TSX' as I am considering a similar approach. I am certainly no expert in investing and so, it is with a little fear and trepidation that I make this post, considering that there are people here who really do know what they are doing. But, I thought I would post it anyway as it may help others who are looking at this approach. A little more grist for the mill, perhaps. It least it will show where some of the main Canadian sites to find information on this kind of approach are. And also, so that those of you who are more experienced might correct any erroneous thinking or knowledge.
I have also followed David Stanley's portfolios in the Moneysaver magazine. It is appealing approach because you seem to be able to make a descent return without spending all your time keeping on top of stocks. You don't have the possibility of making that 'little bit more' as if you fiddle with it. But, a return like Stanley's would be good enough for me.
I have, though, had some of the concerns mentionned in this thread. Mainly concerns about diversification and the possibility of a higher return. I know that I said earlier that I liked the ease of 'The Beating the TSX' approach. But, if there was another approach that offered the possibility of a little higher return and greater diversification without too much more trouble, it might be welcome.
I have been looking at various possibilities. One is the Canadian Shareowner, which offers a gradual approach of dollar cost averaging.
http://www.investments.shareowner.com/i ... ation.html The advantages here are that you can get an almost instant diversification and the possibility of building up a diversified portfolio for quite a low fee. While Stanley concentrates on largely Drip stocks, Canadian Shareowner provides access to smaller and faster growing companies, which could give a higher return. At first I hadn't liked the idea of dollar cost averaging, thinking instead that I could buy these securities when they are relatively low priced. Someone mentionned, however, that when securities have a low price there is usually a reason for it and you may be afraid to buy because of that reason. True enough.
But, then i realised that this may be more true for smaller and higher growth stocks. These are not the kind that Stanley pursues. I could stick to these large cap, relatively stable companies and possibly buy them at a discount. Another reason for buying a bigger amount all at one time and of the larger companies is that this kind of process seems to depend upon the compounding affect of dividends. This is greatly enhanced by buying a large amount at the beginning and letting the compounding dividends do their work. In my mind this would be an argument against dollar cost averging in regular drips, as well.
The nagging question of diversification and quality of companies still remains, however. Staneley's portfolio this year consists of five banks, a couple of utility companies and an insurance company.
In the June issure of Canadian Money Saver, Norm Rotherery offered another version of a drip portfolio, which might provide better diversification and better quality growth without too much more work:
''A portfolio of seven stocks does not provide adequate
diversification but this problem can be overcome by
moving beyond SPP eligible stocks. In my view, it is
more important to select good long-term stocks than
to stick with poor stocks just because they have share
purchase plans.''
Yet, Norm appears to like this kind of thing. I can imagine that David Stanley might say,'Well, I've done pretty well so far without much trouble. It is not worth it to me to change.' The beauty of all of this, of course, is that there is no one 'best way'. It depends a lot upon one's temperment and outlook. I think I would be more inclined to go with Norm Rothery's approcah.
Then there is the question of when to buy. Both Stanley and Rotherey buy at a given time. They believe that the fact that it is a high dividend approach guarantees buying at low prices. But, if you look at this list of relative high and low dividend ratios produced by Mike Higgs,
http://www.dividend-growth.org/DivRepor ... 053105.pdf you will see that in May, when these portfolios were bought, many of these stocks weren't bargain-priced relative to their own ratios between high and low dividends.
What to do? Enter Thomas Connoly, who prints a newsletter and operates a website called 'Dividend Growth'.
http://www.dividendgrowth.ca/pages/old_site/about.html Connoly says that investing in Blue Chip Canadian stocks is not too risky, as they usually vary only a few dollars per year. Rather than using a traditional 'Dogs' approach, Connoly seems to wait for his stocks to exhibit a high dividend and to have had a dividend increase in the last year. The seeming disadvantage to this approach in relation to Stanley's is that, if you were to build up your portfolio over several months and even years, you would have even less diversification, at least for a time, than even Stanley has.
What is the conclusion to all of this? I will buy blue chip stocks from a discount broker. That is sure. I will try to pick and choose between Rotherey and Stanley in order to get a more diversified and yet simple strategy. Although I am not sure I will follow the 'Dogs' approach. I may, like Connoly, wait for a better buying point and build up over time. But, I will buy a few, not all, of Stanley and Rothery's picks right away. I will also supplement this with a drip portfolio. I make make large contributions to the drip when I think they are down and dollar cost averaging certain ones.
thanks Joe