Retirement 100 | Fall 2011

I’m a big fan of the British TV series Jeeves & Wooster, based on the comedic scribblings of P.G. Wodehouse. In the series a young Hugh Laurie (now better known as the acerbic Dr. House) plays the aristocratic and lovably foppish Bertie Wooster who must be regularly rescued by his clever servant Jeeves, played by an impish Stephen Fry. The show revolves around the bother caused by Bertie’s newt-addled friends and unusually meddlesome aunts, who constantly interrupt his life of fun and leisure.

But Bertie’s carefree lifestyle is the product of inherited wealth and he would be in deep trouble without it. Such is the good fortune of the lucky sperm club. Alas, if you’re like me, you weren’t born with a silver spoon in your mouth and you have to worry about money. But fear not, there is hope for us common folk. A good dollop of thrift and hard work is all that’s required to build up an income portfolio that can generate enough cash to support a comfortable retirement or life of leisure.

When it comes to investing for income, most people should consider adding at least a few good dividend stocks to their portfolio because they can provide a regular, and hopefully growing, series of cash payments. (If you would like to build an entire income portfolio, read “The ultimate income portfolio”for instructions.) In addition to generating an income, companies that pay dividends tend to be large, mature firms that can more easily cope with changing economic circumstances than smaller firms. Their size and relative stability means that dividend stocks are generally easy to hold. Don’t get me wrong—they aren’t without risk, but dividend investors often sleep better at night than those who hold other kinds of stocks. That’s a nice feature for those who want to relax and have fun instead of constantly watching the markets.

In our annual Retirement 100 listing we endeavour to highlight the best dividend stocks in Canada and the results have been highly satisfactory so far. Our A-graded stocks—we call them our Retirement All-Stars—have gained 39.2%, including dividends reinvested annually, since we started four years ago. When you look at the group of stocks that rated either an A or B, the average gain comes in at 20.3%.

Our long-term results far exceed the returns from the markets overall. By way of comparison, the iShares S&P/TSX Composite exchange-traded fund (ETF), which tracks Canadian stocks in general, has advanced a paltry 2.3% since we started. The iShares Canadian Dividend ETF, which tracks 30 of the largest dividend stocks in Canada, climbed only 6.6% over the same period. That means our Retirement All-Stars have beat the overall market by a staggering 36.9 percentage points over four years, while thrashing Canada’s largest dividend ETF by a remarkable 32.6 points.

This year the gains continued to be respectable. Last year’s Retirement All-Stars climbed 8.4%, while the S&P/TSX Composite ETF advanced 4.9% and the Dividend ETF moved 5.9% higher. That’s not bad considering the downturn the market encountered late this summer.

While we’re pleased with these results, we aren’t saying that you’ll make a fortune by buying every A-rated stock. As the past few years have amply demonstrated, the stock market is about as predictable as Bertie on a bender. On occasion the entire market suffers from a nasty hangover and profits dribble away. Even in more buoyant times when most of the market is partying, individual stocks can suffer from indigestion. Nonetheless, we think the A-rated stocks deserve your attention.

Read about How we graded Canada’s largest dividend stocks.