Dogs of the TSX Dividend Stock Picks

I’ve been writing about the “Dogs of the TSX” Canadian investing strategy for about twelve years now. I can’t claim that I was the creator of the idea though. In fact, no Canadian can really lay claim to the “Dogs’” principles.

The Dogs of the TSX can trace its roots back to the “Dogs of the Dow” strategy in the USA. The first place that I saw the idea being applied to Canada was when MoneySaver magazine started writing about the BTTSX or Beating the TSX Dividend Stock Strategy. (Click here to skip directly to my 2024 picks).

The theory behind the Dogs of the TSX strategy is to look for solid cash-flow positive stocks that have fallen out of favour for one reason or another. In other words, you’re looking to take advantage of short-term market inefficiency when it comes to the pricing of blue-chip Canadian stocks.

While the Dogs of the TSX investments finished 2023 about 3% behind the overall TSX 60 index, if we go back to 2021, the 3-yr performance favours the BTTSX stocks by about 5% annually, and it has historically outperformed by about 2.5% for a long-term average.

In its pure original form, the Dogs the TSX strategy simply involved ranking the companies in the Toronto Stock Exchange 60 index (aka: TSX 60) by their dividend yield. The highest yield gets the top spot. Then you simply choose to invest equal amounts in all ten stocks.

The idea is that investing in companies that have relatively high free cash flow – but relatively low share prices – is an excellent way to systemically outperform the broader market. No need to pick stock winners with any sort of fancy algorithm – just choose dividend stocks that are out of favour and consequently have high yields.

The average yield for the stocks making the 2024 Dogs of the TSX is about 6%.

In my own implementation of the BTTSX strategy I eliminate Real Estate Investment Trusts (REITs), and any stocks that have cut dividends OR have insanely high payout ratios (foreshadowing a future dividend cut).

You’ll notice that my Dividend Dogs of the TSX list has a lot in common with my Best Canadian Dividend Stocks list that I update monthly. There’s obviously a lot of overlap in selecting value-driven, stable, Canadian company stocks.

Top Canadian Dogs of the TSX Pick for 2024: Power Corp (POW)

My favourite stock of the 2024 Dogs of the TSX is Power Corp (POW) – an old standby for Canadian dividend investors.

For those that aren’t completely familiar with the company, Power Corp is basically a holding company for Great-West Life Insurance, IGM Financial (previously “Investor’s Group” and “Mackenzie Investments”) and a holding company full of European diversification that goes by Groupe Bruxelles Lambert. You can see their entire business structure below:

Of these companies, Great West Life is by far the biggest chunk of the overall Power Corp portfolio (making up nearly 70% of the holding company). As interest rates inevitably continue to trend downward, Canadian life insurance companies should do quite well.

While I am less of a fan of the various mutual-fund-dependent companies under the IGM banner, I think Power has made a smart investment in the Wealthsimple robo advisor, which should help to offset the losses they see in their traditional wealth management models. Wealtsimple could make big news if its bid to become a Schedule 1 Bank goes through. Essentially Power is disrupting their own business model before someone else does!

Last year saw a really solid Earnings-per-Share jump for Power Corp, and their Great West Life crown jewel looks significantly undervalued to me – especially if interest rates begin to decrease. With a low P/E ratio of about 10x, and a juicy 5.2% dividend yield, I think it’s tough to go too far wrong. We have already seen a 6% dividend raise for Power Corp shareholders in 2024, plus stock buybacks as well.

Bottom line – I think Power Corp is worth more than the sum of its parts, and I love the dividend I’m going to get paid (not to mention the stock buybacks) while investors come to realize the underlying value of the companies in the Power portfolio.

So far so good in 2024, as my top pick of Power Corp (POW) is up about 14.5% YTD. When you layer that 5.2% dividend on top, you’re looking at very close to a 20% total return – a substantial premium on the average 2024 Dogs of the TSD stock, as well as the TSX 60 index as a whole.

Dogs of the TSX Dividend Stock Strategy Implementation

Here is the step by step procedure of how this strategy is implemented:

1. Sort the TSX60 by dividend yield.

2. 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).

3. 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.

4. 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.

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.

Beating the TSX Dividend Stock Picks For 2024

Now, for what you’ve all been waiting for, the 2024 BTTSX stock picks (with a juicy average dividend yield of about 6.5%!)

1. Enbridge (ENB)
2. BCE (BCE)
3. TC Energy Corp (TRP)
4. Algonquin Power and Utilities Corp (AQN)
5. Bank of Nova Scotia (BNS)
6. Telus (T)
7. Pembina Pipeline (PPL)
8. Emera (EMA)
9. CIBC (CM)
10. Power Corp (POW)

If you’re curious, here’s what the Beating the TSX strategy had us picking in 2023:

1. Algonquin Power and Utilities Corp (AQN)
2. Enbridge (ENB)
3. TC Energy Corp (TRP)
4. Bank of Nova Scotia (BNS)
5. BCE (BCE)
6. CIBC (CM)
7. Power Corp (POW)
8. Pembina Pipeline (PPL)
9. Manulife (MFC)
10. Telus (T)

For further context, here’s the old the MDJ 2022 BTTSX picks:

1. Enbridge (ENB)
2. Pembina Pipeline (PPL)
3. BCE (BCE)
4. TC Energy Corp (TRP)
5. Manulife (MFC)
6. Algonquin Power and Utilities Corp (AQN)
7. Power Corp (POW)
8. Suncor (SU)
9. Bank of Nova Scotia (BNS)
10. Telus (T)

The 2024 Dogs of the TSX group contains 2 telcos, 3 financials, 1 pure utility, 1 utility + renewable hybrid, and 3 pipeline utilities (or “mid-stream” energy companies).  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 2024.

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:

1. Enbridge (ENB)
2. Scotia Bank (BNS)
3. BCE (BCE)
4. TC Energy Corp (TRP)
5. Telus (T)
6. Manulife (MFC)
7. TC Energy Corp (TRP)
8. Power Corp (POW)
9. Pembina Pipeline (PPL)
10. Algonquin (AQN)

2024 Dogs of the TSX Performance Year to Date

So far in 2024 we see an average return of about 4.61%. If we include the 6% dividend yield, we’re looking at a total return for the year of about 10.61%. That’s not too bad, but with the overall TSX 60 currently setting at about a 17% YTD return, it’s not great either.

My bet for the final few months of the year is that the banks, utilities, telecoms, and pipelines will continue to see share prices go up due to lower interest rates. This should close the gap a bit, but it looks like 2024 will probably go down as a loss for the BTTSX strategy. The BTTSX will of course still be quite far ahead when we consider the last several decades.

My Own Implementation of Beating the TSX

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 Qtrade.

My net worth update from the end of the 2023 shows that I’m now generating $78,800 in dividend cash flow each year. That’s a figure that I logically thought I would see one day when I did the math, but it’s still somehow a surprise when I typed it out.

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 5 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.

Since inception in September 2017 to January 2022, using XIRR the portfolio has returned about 12% 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 2024 Dividend Picks After Adjusting for Dividend Growth

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Dogs of the TSX FAQ

Final Thoughts

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.

Using an all-in-one ETF can give you instant international exposure, and is especially key for getting some of your money into areas like tech and healthcare where Canada doesn’t have many champions.

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.