The Dogs of the TSX

Looking for some shaggy bargain stocks? These high-yield dogs are temporarily on sale.

Jacqueline Nelson 0


 

The Dogs of the TSX is a variation of the Dogs of the Dow, a popular investing strategy in which you buy the 10 stocks with the highest dividend yield on the Dow Jones industrial index, then sell them a year later and begin the process anew. Our version selects the 10 stocks with the highest dividend yields from the S&P/TSX 60 Index.

This is essentially a value strategy, in which we’re looking for companies that have strong fundamentals but are trading particularly cheaply right now. It works because large corporations tend to offer fairly steady dividend increases and will avoid slashing dividends at all costs. Because the dividend yield is the annual dividend divided by the stock price, as long as the dividend remains fairly steady, a high yield is indicative of a low price. In short, these are stocks that are near the bottom of their business cycles, and thus have a lot of upside potential.

This method for choosing stocks has gone through a rough patch lately, but there are signs that performance is starting to improve. Still, it’s advisable to research the individual companies to make sure they haven’t lost the market’s confidence for good reason. As you can see above, many of the 2012 dogs are oil and gas companies, following a year in which strong oil prices were offset by low natural gas prices for some producers.

TransAlta, Canada’s largest publicly traded power generator and marketer—and a chronic dog—is a good example of the mixed prognoses the dogs can produce. The company had a tough first quarter due to low gas prices and high maintenance costs. It also announced that it’s abandoning a $1.4-billion carbon-capture centre. On the other hand, its coal-generated power business is doing very well.

As for BCE, the company that earned the best annual return of the stocks on last year’s list, it’s no surprise it’s back: it has been a resident dog since 2009.

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