Over the past number of years, I’ve been writing about the investing strategy known as Dogs of the TSX (taken from “Dogs of the Dow” in the USA) – also known as the Beating the TSX Dividend Stock Strategy (BTTSX). (Click here to skip directly to my 2022 picks).
The principle of this strategy is to systematically filter undervalued blue-chip stocks each year. The filter for our stock selection is mainly dividend yield. While this is an imprecise metric, what higher yields generally signify (at least amongst the large dividend-paying Canadian oligopolies) is that a company’s share price is lower than it should be relative to its free cash flow.
So what I like to do is take the 60 largest stocks on the Toronto Stock Exchange (aka the TSX60) and sort them by dividend yield. Then I remove income trusts and stocks that have cut dividends OR have crazy-high payout ratios (and consequently, are at risk of cutting their dividend).
You’ll notice that it has a lot in common with my Best Canadian Dividend Stocks 2022 list that I update monthly.
While 2022 is shaping up to be an all-time doozy of a downturn for the world’s stock markets, our Dogs of the TSX investing strategy has held up far better than most portfolios. Canada’s energy companies, pipeline stocks, and utilities are keeping many portfolios above water – while tech-heavy investors are floundering.
Top Canadian Dogs of the TSX Pick for 2022: Algonquin Power and Utilities Corp (AQN)
Last year’s Dogs of the TSX list resulted in Enbridge being the top pick – and it came through big time for us. With a capital gain of over 21%, and a dividend yield that was over 8% when we wrote the article last year, we realized a total gain of almost 30% for this Canadian dividend king.
I say that only to properly frame the context for my “Dog of the TSX” 2022 stock pick: Algonquin Power and Utilities Corp (AQN).
This one stings! But I feel it’s important to be brutally honest with readers when things don’t go as predicted. Hopefully it lends credibility to when we get things right – and by the way, I still honestly feel that we’re going to be right on AQN in the long term!
That said, on Friday, November 11th Algonquin released an earnings report that didn’t meet expectations. Earning per share came in slightly lower than expected, and the company revised their guidance downward for the year by 10%. I have to be honest in saying that I did not foresee the 19% plunge that shares took following this news.
Back in December 2021, my investment thesis for Algonquin was simple:
- Canadian utilities are dependable dividend gushers that include a lot of regulated cash flows.
- Algonquin’s green energy investments were likely to get a boost given the potential for government subsidies and increased attention to overall power generation in 2022.
- Algonquin’s 5% dividend yield was pretty sweet. [November Edit: Now 8%]
- I believed that the company’s share price had been forced down simply due to being classified as an “oversold green energy company” and there was a very good chance it would start to revert back to the mean over time.
Here’s what was reported in the earnings announcement:
- Earnings per share of $0.11 (down 27% vs last year)
- Revenue as up to $666M (26% increase from last year)
- The dividend was increased by 6% earlier in 2022, but no increase this quarter.
- Algonquin has sold some equity in various projects (known as asset recycling). They got great value on these sale prices, and this fits with their strategy of bringing their “greening” expertise to bear on traditional energy assets – upping their value – and then selling for a profit in order to get more capital.
Message boards were full of worry about whether the dividend was safe, and if the company was in big trouble with rising interest rates. Honestly, this makes very little sense to me from a rational standpoint. It’s an excellent example of a nervous market reacting to some bad news in an insanely drastic manner.
Here’s a few pieces of information to chew on as we consider what to do going forward:
1) The dividend is now 8%. This is insane value, and I have purchased more of the stock already.
2) When EPS comes down 9%, there is some reason for a 5%-ish fall in share price. The 19% fall is completely disproportionate and reveals a lot of investors that are not confident in their investing thesis.
3) Algonquin is NOT dramatically affected by the rising interest rates. The company doesn’t carry a ton of debt relative to other utility companies AND much of that debt isn’t due for 3+ years. It’s locked in at the very low rates we saw the past couple of years.
Even if interest rates go up another 1-2% (doubtful it will be higher than 1.5% after the US CPI numbers last week), we’re only talking 15-30M in annual increased interest costs for Algonquin. This is a company that is set to make over $400M this year. That means the interest rate increase will sting a bit, but we’re not talking panic by any stretch here.
4) Algonquin management has given no indication that they plan to cut their dividend, and to be honest, I see no need to. Their AFFO payout ratio is still only about 60% (up from 57% in 2021).
5) AQN managed to negotiate a better purchase price on their big acquisition of Kentucky Power. The substantial purchase will add to free cash flow going forward.
Look – I don’t know what this stock will do in the short term. Fear and panic do weird things to people. But long term, this is still a company that gets the bulk of its revenue from basic utility deals in areas where it has a regulated monopoly. There is just no way a 19% drawdown should ever happen. This isn’t like a bio pharma stock that saw its new drug fail to pass inspection or something like that!
Algonquin has a great track record of being able to manage utility companies and add value in the renewable energy space. While its stock dilution has been irritating at times, it has allowed the company to grow without adding crushing debt loads (which looks like a pretty smart move at the movement).
Until they prove that they have lost their touch when it comes to bringing value to new projects I will continue to give them the benefit of the doubt. Plus, at this entry point, the downside is incredibly miniscule. Even just their attractiveness as a takeover target puts the fair market value WAY higher than the current price point.
If you want to do your own analysis on whether or not this is the perfect entry point for Algonquin, I recommend the Dividend Stocks Rock platform. When the Algonquin earnings news broke, DSR released a special report within hours addressing literally every single one of my concerns. You can read our full Dividend Stocks Rock review for full details on their tools, advice, and pricing.
In his analysis Mike even stated that he was so confident in the long-term returns of the stock that he immediately purchased shares after the nosedive. In his child’s RESP no less! Now that’s confidence. If you want immediate analysis like this, check out the exclusive promo offer below.
Dogs of the TSX Dividend Stock Strategy Implementation
Here is the step by step procedure of how this strategy is implemented:
- Sort the TSX60 by dividend yield.
- Purchase the top 10 positions with equal dollar amounts but remove former income trusts (maybe some exceptions) and stocks that have a shaky dividend history (ie. dividend cuts, cyclical companies, pausing dividends etc).
- Hold your positions until the new year at which point you check the list of top 10 yielding blue chips on the TSX again. If there are any differences, you swap out positions until they match.
- Repeat annually going forward.
While it may sound like a lot of portfolio churn, since the TSX is fairly small, the top 10 list doesn’t vary much from year to year.
It also turns out that a number of the largest dividend stocks in Canada are also dividend growth stocks. While the traditional method of picking these positions is to buy the top 10 while removing former income trust and companies that have cut their dividends in the past, I prefer to pick stocks that also have a history of dividend increases (most of them do).
Performance of the BTTSX Strategy
As magical as it may seem, this strategy has been outperforming the TSX over the long term. Mind you, the strategy does not outperform every single year, but it has outperformed over the long term (however, note that past results do not guarantee future returns).
According to the Beating the TSX Wiki page, between 1987 and 2017, the BTTSX had an average return of 12.4% vs the TSX which has returned about 9.6%.
As you know, small improvements in portfolio performance can lead to a significant difference in portfolio size over the long term. Note my article on improving your portfolio performance by 1.7% through reducing your portfolio MER can lead to a 60% difference in portfolio size over 30 years. It also helps to use a low-cost online broker.
I like this strategy in that investors are getting the highest possible yield out of the largest blue-chip stocks in Canada with the possibility of dividend increases. There were a few dividend cuts in 2020 as companies sought to fortify their balance sheets in case the market crises carried on for several years. The next couple years look like much more solid footing for our dividend kings.
The downsides are that there is annual turnover (usually minimal) which can result in a tax hit in non-registered accounts and potential lack of diversification depending on the year. For example, one year, it could be a high concentration of financial stocks in the portfolio, and the next could be utilities.
BTTSX Dividend Stock Picks For 2022
Now, for what you’ve been waiting for, the 2022 BTTSX stock picks. Before we get into the 2022 picks, let’s take a look at last year.
As we head into 2022, here are the MDJ 2022 BTTSX picks:
- Enbridge (ENB)
- Pembina Pipeline (PPL)
- BCE (BCE)
- TC Energy Corp (TRP)
- Manulife (MFC)
- Algonquin Power and Utilities Corp (AQN)
- Power Corp (POW)
- Suncor (SU)
- Bank of Nova Scotia (BNS)
- Telus (T)
The 2022 group contains 2 telcos, 2 financials, 1 pure utility, and 4 pipeline utilities (or “mid-stream” energy companies), and 1 natural resource stalwart. For a complete portfolio, we would also need materials/resources, real estate, technology, and consumer stocks. If you want to round out your dividend portfolio, check our top dividend stocks for 2022.
If you are considering this strategy, I would recommend using it as part of your Canadian exposure and using index ETFs for global diversification.
My top 10 holdings after several years of doing the BTTSX are:
- Enbridge (ENB)
- Power Corp (POW)
- CIBC (CM)
- Scotia Bank (BNS)
- Manulife (MFC)
- BCE (BCE)
- Bank of Montreal (BMO)
- Toronto Dominion Bank (TD)
- Telus (T)
- Brookfield Infrastructure (BIP)
My Own Implementation of BTTSX
I mentioned in an earlier financial freedom update that my spouse had some cash saved up, and we were looking to deploy into dividend stocks using the Dogs of the TSX strategy. We ended up opening yet another account at Questrade.
Our “non-registered” dividends shown in a recent update are from our “BTTSX” dividend portfolio.
- Total Portfolio Value: $1,263,610
- Total Yield: 4.71%
- Total Dividends: $59,500/year (+7.8%)
Being a dividend growth investor, we decided to utilize a hybrid approach to this strategy. We essentially sorted the TSX60 by yield, but only picked stocks with a history of dividend increases. We also added a couple of positions for diversification. So it’s not a pure Dogs of the TSX investing strategy.
While going through this process for almost 3 years now, I’ve noticed that I’m good at picking and buying the stocks, but terrible at selling! I’d much prefer to add to existing or new positions with new money rather than selling to gain capital. As of this post, I have not sold any of my original positions.
Having said that, this is what the portfolio looks like today:
- BCE (BCE)
- Enbridge (ENB)
- CIBC (CM)
- Telus (T)
- Canadian Utilities (CU)
- TransCanada (TRP)
- Sunlife (SLF)
- Great-West Life (GWO) – POW owns GWO
- Emera (EMA)
- Royal Bank (RY)
- Canadian National Railway (CNR) – added this for a bit of diversification
- Thompson Reuters (TRI)
Since inception in September 2017 to January 2021, using XIRR the portfolio has returned about 11% while the index (XIC.TO) has returned about 8%. Not a bad result, but in reality, I’m more focused on the dividends that the portfolio produces.
My Overall Top 2022 Dividend Picks After Adjusting for Dividend Growth
5yr Revenue Growth
5yr EPS Growth
5yr Dividend Growth
Taking Dividend Investing to The Next Level
Most of my picks are based on the information i get from Dividend Stocks Rock (DSR).They offer a free newsletter full of excellent advice that will help you maximize your yields. On top of that, the optional paid subscription gives you access to a bunch of excellent tools, as well as expert advice tailor-made for your specific portfolio!
DSR is managed by fellow blogger Mike from the Dividend Guy Blog since 2013, and his results during this time has been nothing short of amazing. Read our detailed DSR review, or sign up now by clicking the button below to get 33% off by using the code MDJ33.
Dogs of the TSX FAQ
As you can see, the BTTSX strategy has been outperforming the TSX over the long term. Mind you, the strategy does not outperform every single year, but it has outperformed over the long term (however, note that past results do not guarantee future returns).
Perhaps it’s the fact that large-cap stocks on the TSX tend to beat Canadian small caps, which at times can act as a drag on the overall index (Canadians love their oligopolies with large barriers to entry after all). Another reason may be that as yields rise for blue chips, it may mean that their stock price is relatively low which can equate to a form of value investing.
If you are considering the Dogs of the TSX strategy, I would recommend using it as part of your Canadian exposure and using all-in-one ETFs for added diversification.
Canadian dividend stocks have historically been an excellent value (and I honestly believe they represent one of the best places to build your nest egg) but a responsible investor knows that diversifying risk is essential to long-term success.
See my Canadian dividend stocks list for more information on what I’m putting new money into these days.
I've Completed My Million Dollar Journey. Let Me Guide You Through Yours!
Sign up below to get a copy of our free eBook: Can I Retire Yet?