Stocks not for the squeamish

There’s nothing better than starting the day with a breakfast of sausages and eggs. But a little coffee on the side is nice too.

As tasty as sausages are, I’m not keen on watching them being made. (Nor do I want to get anywhere near the house of commons.)

Investors face a similar situation. While a portfolio might provide pleasing returns, it likely contains more than a little gristle.

To demonstrate the inner workings of a simple portfolio I decided to focus on the 60 large blue-chip Canadian stocks in the S&P/TSX 60 index.

A portfolio with an equal dollar amount invested in each stock in the index gained 12% over the last 12 months. That’s a pretty good result. But the individual stocks in the portfolio jumped around like drunken sailors over the same period. Some popped sky high and others went down the drain.

I’ll start with the losers. Sixteen of the sixty stocks lost money over the course of the last 12 months and that includes dividends. The biggest loser was Yamana Gold (YRI), which plummeted 50%. But Talisman (TLM) wasn’t far behind with a loss of 45%. I could go on, but I’d rather not dwell on the nasty bits.

Most positively, BlackBerry (BB) was the top stock with a gain of 81%—even though most investors had given up on it. Tim Hortons (THI) was the second best performer with an advance of 54%.

Overall most stocks were winners and the median return, over the last 12 months, was a solid 16%. That is, thirty stocks gained more than 16% and the others returned less. Naturally, the situation wouldn’t be as rosy in a bear market.

The point being that index investors (and mutual fund investors) only see the overall return, less fund fees and other frictions. They get to eat their returns while being blissfully unaware of what goes into them.

Those who invest in stocks directly have to be prepared to see how the return sausage gets made. Good investors can resist becoming overly alarmed when stocks jump around wildly. The best focus on the overall results instead.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as earning more than they pay in dividends. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of Nov. 24. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase—barring some calamity.

Notes:

Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

New & Noteworthy

Strategy Change

Money manager and author Joel Greenblatt talks to Consuelo Mack about diversification and his new approach to investing in this video.

Just For Fun

This week’s challenge is to find two 5-letter words using the letters in the ticker symbols of Cameco (CCO) and Gildan Activewear (GIL). Hint: Both can afflict young Vulcans. Leave your answer in the Comment section below.

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Norm Rothery, CFA, PhD, is the founder of StingyInvestor.com