How the Hot Potato is cooking

Here’s where the spicy version of the classic Couch Potato portfolio stands

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I highlighted an active approach to index investing in “Are you ready for the Hot Potato?” in the April 2016 issue of MoneySense. The article generated a lot of discussion and I answered a few questions about it last time.

Because I ran the numbers for the article a few months ago, it seems like high time to provide a quick update on where the Global Hot Potato stands today.

You’ll remember that the classic Global Couch Potato puts an equal amount of money into Canadian bonds, Canadian stocks, U.S. stocks, and global stocks. But the Global Hot Potato puts all of its money into the top performing index over the prior 12 months and rebalances monthly.

Practically speaking, the Global Hot Potato has been fully invested in U.S. stocks (as represented by the S&P 500 index) since the fall of 2014.

While the market turmoil of the last few months threatened to change matters, U.S. stocks narrowly outperformed Canadian bonds over the 12 months through to the end of April. (The other two options, Canadian stocks and global stocks, trailed far behind.)

As a result, the Global Hot Potato will stay with the S&P 500 this month. But be sure to keep an eye on it because the portfolio could move into a new asset class—depending on how the markets fare—this month.

For those keeping score, the Global Hot Potato outperformed the Global Couch Potato handily over the last 10 years. The spicy spud provided average annual gains of 9.8% over the course of the decade to the end of April while the regular version yielded gains of only 5.6% per year.

It will be interesting to see how both fare in the future.

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 having positive earnings. 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 May 2. 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.


Name Price P/B P/E Earnings Yield Dividend Yield
Shaw (SJR.B) $23.32 2.1 13.4 7.46% 5.08%
National Bank (NA) $44.52 1.6 10.94 9.14% 4.85%
CIBC (CM) $100.49 1.91 11.12 9.00% 4.70%
BCE (BCE) $58.64 4.07 18.5 5.41% 4.66%
Bank of Nova Scotia (BNS) $65.17 1.54 11.26 8.88% 4.42%
TELUS (T) $39.84 3.09 17.4 5.75% 4.42%
Emera (EMA) $45.48 1.92 16.7 5.99% 4.18%
Royal Bank (RY) $77.71 1.83 11.65 8.58% 4.17%
Bank of Montreal (BMO) $81.66 1.37 12.15 8.23% 4.11%
Agrium (AGU) $107.81 1.79 12.29 8.14% 4.07%

Source: Bloomberg, May 2, 2016

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.)

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5 comments on “How the Hot Potato is cooking

  1. How well would the Hot Potato fare if more asset classes were available to it. For example, some REIT indexes exceed the 12 month returns of US Equity.

    Reply

  2. Hey Norm,

    I’m a bit confused as to how you concluded that the S&P 500 has outperformed Canadian Bonds over the previous year (up to end of April).

    Are you looking at the S&P performance in CAD (unhedged). One would think that you would want to eliminate currency fluctuation (as it is unpredictable) from the index momentum evaluation, in which case you would look at the S&P performance in USD.

    The other possibility is that our evaluation benchmark indexes may be slightly different.

    I’m using ones to mirror my TD e-series allocation benchmarks: FTSE TMX Canada Universe Bond Index total return, S&P 500 Index total return (CAD-hedged), S&P/TSX Composite Index total return, and MSCI EAFE total return (CAD-hedged). For me, the easiest way to freely see the 1 year performance of these indexes is to look at the benchmarks listed on the equivalent iShares or Vanguard ETF profiles. In this case, the Vanguard S&P 500 Index ETF (CAD-hedged) (VSP) profile shows the 1y total return of the S&P 500 Index (CAD-Hedged) to be 0.52%, while the iShares Canadian Universe Bond Index ETF profile shows 1y total return of the FTSE TMX Canada Universe Bond Index to be 2.09%. If you go back to then end of March, however, the S&P 500 was narrowly outperforming the bond index (0.91% vs. 0.78%). So if you went by these benchmarks, you would have actually swapped out of US stocks to Canadian bonds this month!

    Could you clarify what indexes you use to evaluate index performance (hedged or unhedged and price return or total return) or at least point me in the right direction?

    Thanks a bunch,
    Adrian

    Reply

    • No one (Norm or otherwise) has any thoughts on this? Just looking for a little guidance folks :(

      Reply

    • Hi Adrian,
      I pass questions on the Hot Potato on to Norm once or twice a month. He’ll try to answer it in one of his upcoming blogs on our web site. Hope that helps, J.

      Reply

      • Great! Good to know that someone is reading these.

        Cheers,
        Adrian

        Reply

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